RBC’s Exposure to Credit or Counterparty Risk
For the banking industry in general, credit risk is known as one of the major risks that can affect the company. Credit risk occurs when the bank and another party or financial institution come to terms on an agreement by which both parties have agreed to meet its obligations. Therefore, with every loan, or any other transaction that offers credit or settlements, the bank exposes itself to credit risk. In the case of RBC, they are exposed to credit risk in many ways as they offer a wide variety of credit-related services and products in Canada and other parts of the world. Some of these services and products include: “asset-backed financing, margin lending, securities lending and project finance loans, credit cards, lines and letters of credit, and residential and commercial mortgages.” RBC is also exposed to credit risk from other activities that do not relate to its products or services. Such activities include: “short-term investments relating to liquidity management and insurance business investment activities.”1
RBC’s Exposure to Subprime Debt
The credit markets declined dramatically in October 2007 following the downgrade of subprime Residential Mortgage-Backed Securities (RMBS) and Collateralized Debt Obligations of Asset-Backed Securities (CDOs of ABS). In effect, RBC recognized $357 million of losses in their Capital Markets. This occurred due to write-downs in the fair value of their RMBS and CDOs of ABS. By October 31, 2007, RBC stated that their Capital Markets had “$216 million of net exposure to U.S. subprime CDO's of ABS, after taking into consideration protection provided by credit default swaps.”1. These swaps provide a protection of about ...