RBC expands market risk model scope

Moving assets off standardised approach contributed to 6% quarter-on-quarter RWA decline

Royal Bank of Canada posted a C$2 billion ($1.5 billion) drop in market risk-weighted assets (RWAs) in the three months to end-July, primarily driven by switching to using its internal model to calculate capital requirements for certain fixed-income products. 

The 6% fall brought total market RWAs down to C$29.4 billion.

Market RWAs calculated using the standardised approach fell to $12.5 billion from $13.3 billion quarter-on-quarter, as the bank integrated products that affected its interest rate and securitisation risk profile into its internal model.

Internal model market RWAs dipped to C$16.9 billion from C$18.1 billion over the same period. Changes in risk levels because of portfolio mix and market movements accounted for C$1.3 billion of the fall. 

Market RWAs made up 6% of RBC’s total quarter-end RWAs of C$510.7 billion. 

What is it?

RBC calculates its market RWAs using both standardised and internal model approaches. 

Standardised approach RWAs are calculated by summing regulator-defined charges for interest rate, equity, foreign exchange and commodity risks on trading assets together with charges for options and securitisation positions.

Internal model RWAs are generated using the bank’s own value-at-risk model, to calculate a VAR and stressed VAR-based charge, and an incremental risk charge model for bonds, credit products and credit derivatives.

Why it matters

Year-on-year, RBC has been able to claim a net C$230 million reduction to market RWAs by refining its models and expanding the share of its portfolio that can be assessed using them.

Unlike market movements and foreign exchange gyrations, which affect RWAs, the calibration and scope of its market risk models are within RBC’s control. Steadily increasing the amount of assets that can be assessed using the models, rather than the typically more punitive standardised approach, therefore, can help the bank lower the regulatory capital burden of its trading operations over time. 

Get in touch

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Could model updates help improve the return on regulatory capital of RBC’s trading operations? Share your thoughts by emailing louie.woodall@infopro-digital, or sending a tweet to @LouieWoodall or @RiskQuantum. You can also get in touch via LinkedIn.

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