ERM: RBC’s Practical Approach

November 19, 2004 ERM Initiative Staff 2-min. read

Key Highlights:

RBC Financial Group Overview:
- Canada’s largest bank by market capitalization and assets, and a leading bank in North America.
- Market Capitalization: USD 34.28 billion; Assets: USD 326.7 billion; 2003 Profit: USD 2.08 billion.
- Diversified financial services including personal and commercial banking, wealth management, insurance, corporate and investment banking, and transaction processing services.
- Serves over 12 million clients across North America and approximately 30 countries globally, with a workforce of 60,000 employees.
Enterprise-Wide Risk Management (ERM) Approach:
- Traditional Risk Management:
  - Often isolated from returns and opportunities.
  - Fragmented across business units.
  - Focuses on accepting or rejecting risk.
- Enterprise-Wide Risk Management:
  - Links risks to opportunities.
  - Integrated into the overall management process.
  - Collaborates with business units during deal structuring, strategy development, and policy formulation.
- Three Imperatives:
  - Build an organization-wide risk culture.
  - Develop a common unit of measurement for risk.
  - Apply the risk framework to strategic planning.
RBC’s Risk Pyramid:
- Categorizes risks from those with more control (e.g., Credit Risk) to those with less control (e.g., Systemic Risk).
- Risk Categories:
  - Credit Risk
  - Market Risk
  - Liquidity Risk
  - Insurance Risk
  - Operational Risk
  - Reputational Risk
  - Strategic Risk
  - Competitive Risk
  - Regulatory & Legal Risk
  - Systemic Risk
Operational Risk Management Framework:
- Definition: The risk of direct or indirect loss resulting from inadequate or failed processes, technology, human performance, or external events.
- Components:
  - Loss Events Database: Collects historical loss data across all business and functional units globally.
  - Risk & Control Self-Assessments (RCSA) and Key Risk Indicators (KRI): Provide forward-looking risk assessments.
  - Analytics, Risk Capital, and Reporting: Analyze and communicate the current operational risk profile.
  - External Loss Data and Scenario Analysis: Augment internal data and formalize management experience to assess potential risks.
Reputational Risk Management:
- Definition: The risk that an activity of RBC or its representative will impair the bank’s image or public confidence, leading to business loss, legal action, or increased regulatory oversight.
- Management Strategies:
  - Implementation of policies such as the Code of Conduct, Conflicts of Interest Policy, Business Continuity Management Policy, Know Your Client procedures, and Privacy and Information Security Policy.
  - Integration into overall risk management, including credit decisions, policy approvals, strategic assessments, and governance.
Capital Allocation under Basel II:
- Credit Risk:
  - Risk-sensitive capital calculation with three alternatives: Standardized, Internal Ratings-Based (IRB) Foundation, and IRB Advanced.
- Operational Risk:
  - Introduction of an explicit capital charge with three alternatives: Basic Indicator, Standardized, and Advanced Measurement.
Driving Forces for ERM:
- Complex and evolving regulatory environment (e.g., Basel II, Sarbanes-Oxley).
- Increased scrutiny from third parties such as credit rating agencies and auditors.
- Greater focus on governance and operational risks.
- Potential impacts on shareholder value and board accountability.

This presentation provides a comprehensive overview of RBC’s practical approach to Enterprise Risk Management, emphasizing the integration of risk management into the organizational culture, strategic planning, and daily operations to enhance shareholder value.

Click for a link to the presentation.

Citation: “ERM: RBC’s Practical Approach” ERM Initiative. Nov. 19, 2004.