Credit risk

Credit risk is the risk of loss associated with an obligor’s potential inability or unwillingness to fulfill its contractual obligations on a timely basis and may arise directly from the risk of default of a primary obligor (e.g., issuer, debtor, counterparty, borrower or policyholder), indirectly from a secondary obligor (e.g., guarantor or reinsurer), through off-balance sheet exposures, contingent credit risk, associated credit risk and/or transactional risk. Credit risk includes counterparty credit risk arising from both trading and non-trading activities.

We balance our risk and return by setting the following objectives for the management of credit risk:

•

Ensuring credit quality is not compromised for growth;

•

Mitigating credit risk in transactions, relationships and portfolios;

•

Avoiding excessive concentrations in correlated credit risks;

•

Using our credit risk rating and scoring systems or other approved credit risk assessment or rating methodologies, policies and tools;

•

Pricing appropriately for the credit risk taken;

•

Detecting and preventing inappropriate credit risk through effective systems and controls;

•

Applying consistent credit risk exposure measurements;

•

Ongoing credit risk monitoring and administration;

•

Transferring credit risk to third parties where appropriate through approved credit risk mitigation techniques (e.g., sale, hedging, insurance, securitization); and

•

Avoiding activities that are inconsistent with our values, Code of Conduct or policies.

The Enterprise Credit Risk Management Framework (ECRMF) describes the principles, methodologies, systems, roles and responsibilities, reports and controls that exist for managing credit risk within the enterprise. Additional supporting policies exist that are designed to provide further clarification of roles and responsibilities, acceptable practices, limits and key controls within the enterprise.

Credit risk measurement

We quantify credit risk at both the individual obligor and portfolio levels to manage expected credit losses and minimize unexpected losses to limit earnings volatility and ensure we are adequately capitalized.

We employ a variety of risk measurement methodologies to measure and quantify credit risk for our wholesale and retail credit portfolios. The wholesale portfolio is comprised of businesses, sovereigns, public sector entities, banks and other financial institutions, as well as certain HNW individuals. The retail portfolio is comprised of residential mortgages, personal loans, credit cards, and small business loans. Our credit risk rating systems are designed to assess and quantify the risk inherent in credit activities in an accurate and consistent manner. The resulting ratings and scores are then used for both client- and transaction-level risk decision-making and as key inputs for our risk measurement and capital calculations.

Measurement of economic and regulatory capital

Economic capital, which is our internal quantification of risks, is used for limit setting. It is also used for internal capital adequacy and allocation of capital to the Insurance segment. Our methodology for allocating capital to our business segments, other than Insurance, is based on regulatory requirements. For further details, refer to the Capital management section.

In measuring credit risk to determine regulatory capital, two principal approaches are available: Internal Ratings Based (IRB) Approach and Standardized Approach.

The Standardized Approach applies primarily to our Caribbean banking operations and City National and is based on risk weights prescribed by OSFI that are used to calculate RWA for credit risk exposure.

The IRB Approach, which applies to most of our credit risk exposures, utilizes three key parameters which form the basis of our credit risk measures for both regulatory and economic capital.

•

Probability of default (PD): An estimated percentage that represents the likelihood of default within a given time period of an obligor for a specific rating grade or for a particular pool of exposure.

•

Exposure at default (EAD): An amount expected to be owed by an obligor at the time of default.

•

Loss given default (LGD): An estimated percentage of EAD that is not expected to be recovered during the collections and recovery process.

These parameters are determined based primarily on historical experience from internal credit risk rating systems in accordance with supervisory standards.

Each credit facility is assigned an LGD rate that is largely driven by factors that impact the extent of losses anticipated in the event the obligor defaults. These factors mainly include seniority of debt, collateral and the industry sector in which the obligor operates. Estimated LGD rates draw primarily on internal loss experiences. Where we have limited internal loss data, we also refer to appropriate external data to supplement the estimation process. LGD rates are estimated to reflect conditions that might be expected to prevail in a period of an economic downturn, with additional conservatism added to reflect data limitations and statistical uncertainties identified in the estimation process.

EAD is estimated based on the current exposure to the obligor and the possible future changes in that exposure driven by factors such as the nature of the credit commitment. As with LGD, rates are estimated to reflect an economic downturn, with added conservatism to reflect data and statistical uncertainties identified in the modelling process.

Estimates of PD, LGD and EAD are reviewed, and then validated and back-tested by an independent validation team within the bank, on an annual basis. In addition, quarterly monitoring and back-testing is performed by the estimation team. These ratings and risk measurements are used to determine our expected losses as well as economic and regulatory capital, setting of risk limits, portfolio management and product pricing.

Financial and regulatory measurement distinctions

Expected loss models are used for both regulatory capital and accounting purposes. Under both models, expected losses are calculated as the product of PD, LGD and EAD. However, there are certain key differences under current Basel and IFRS reporting frameworks which could lead to significantly different expected loss estimates, including:

•

Basel PDs are based on long-run averages over an entire economic cycle. IFRS PDs are based on current conditions, adjusted for estimates of future conditions that will impact PD under probability-weighted macroeconomic scenarios.

•

Basel PDs consider the probability of default over the next 12 months. IFRS PDs consider the probability of default over the next 12 months only for instruments in stage 1. Expected credit losses for instruments in stage 2 are calculated using lifetime PDs.

•

Basel LGDs are based on severe but plausible downturn economic conditions. IFRS LGDs are based on current conditions, adjusted for estimates of future conditions that will impact LGD under probability-weighted macroeconomic scenarios.

For further details, refer to the Critical accounting policies and estimates section.

Gross credit risk exposure

Gross credit risk is categorized as i) lending-related and other credit risk or ii) trading-related credit risk; and is calculated based on the Basel III framework. Under this method, EAD for all lending-related and other credit transactions and trading-related repo-style transactions is calculated before taking into account any collateral and is inclusive of an estimate of potential future changes to that credit exposure. EAD for derivatives is calculated inclusive of collateral in accordance with regulatory guidelines.

Lending-related and other credit risk includes:

•

Loans and acceptances outstanding, undrawn commitments, and other exposures, including contingent liabilities such as letters of credit and guarantees, debt securities carried at FVOCI or amortized cost and deposits with financial institutions. Undrawn commitments represent an estimate of the contractual amount that may be drawn upon at the time of default of an obligor.

Trading-related credit risk includes:

•

Repo-style transactions, which include repurchase and reverse repurchase agreements and securities lending and borrowing transactions. For repo-style transactions, gross exposure represents the amount at which securities were initially financed, before taking collateral into account.

•

Derivative amounts which represent the credit equivalent amount, as defined by OSFI as the replacement cost plus an add-on amount for potential future credit exposure, scaled by a regulatory factor. For further details on replacement cost and credit equivalent amounts, refer to Note 9 of our 2022 Annual Consolidated Financial Statements.

Credit risk assessment

Wholesale credit risk

The wholesale credit risk rating system is designed to measure the credit risk inherent in our wholesale credit activities.

Each obligor is assigned a borrower risk rating (BRR), reflecting an assessment of the credit quality of the obligor. Each BRR has a PD calibrated against it. The BRR differentiates the riskiness of an obligor and represents our evaluation of the obligor’s ability and willingness to meet its contractual obligations on time over a three year time horizon. The assignment of BRRs is based on the evaluation of the obligor’s business risk and financial risk through fundamental credit analysis, as well as data-driven modelling. The determination of the PD associated with each BRR relies primarily on internal default history since 2006. PD estimates are designed to be a long-run average of our experience across the economic cycle in accordance with regulatory guidelines.

Our rating system is designed to stratify obligors into 22 grades. The following table aligns the relative rankings of our

22-grade

internal risk ratings with the external ratings used by S&P and Moody’s.

Internal ratings map*

Table 41

PD Bands

Ratings

Business and Bank

Sovereign

BRR

S&P

Moody’s

Description

0.0000% – 0.0300%

0.0000% – 0.0150%

AAA

Aaa

Investment Grade

0.0000% – 0.0300%

0.0151% – 0.0250%

AA+

Aa1

0.0000% – 0.0350%

0.0251% – 0.0350%

Aa2

0.0351% – 0.0450%

AA-

Aa3

0.0451% – 0.0550%

2+H

A+

0.0551% – 0.0650%

2+M

0.0651% – 0.0750%

2+L

A-

0.0751% – 0.0850%

BBB+

Baa1

0.0851% – 0.1000%

BBB

Baa2

0.1001% – 0.1770%

BBB-

Baa3

0.1771% – 0.3705%

2-H

BB+

Ba1

Non-investment

Grade

0.3706% – 0.7065%

2-M

Ba2

0.7066% – 1.1600%

2-L

BB-

Ba3

1.1601% – 1.6810%

3+H

B+

1.6811% – 2.3490%

3+M

2.3491% – 4.4040%

3+L

B-

4.4041% – 7.0010%

CCC+

Caa1

7.0011% – 13.1760%

CCC

Caa2

13.1761% – 24.9670%

CCC-

Caa3

24.9671% – 99.9990%

100%

Impaired

100%

This table represents an integral part of our 2022 Annual Consolidated Financial Statements.

Retail credit risk

Credit scoring is the primary risk rating system for assessing obligor and transaction risk for retail exposures. Scoring models use internal and external data to assess and score borrowers, predict future performance and manage limits for existing loans and collection activities. Credit scores are one of the factors employed in the acquisition of new clients and management of existing clients. The credit score of the borrower is used to assess the predicted credit risk for each independent acquisition or account management action, leading to an automated decision or guidance for an adjudicator. Credit scoring improves credit decision quality, adjudication timeframes and consistency in the credit decision process and facilitates risk-based pricing. Since the onset of the

COVID-19

pandemic, we adapted our retail credit risk methodology by enhancing our product level credit strategies with advanced analytics and portfolio monitoring.

To arrive at a retail risk rating, borrower scores are categorized and associated with PDs for further grouping into risk rating categories. The following table maps PD bands to various summarized risk levels for retail exposures:


Internal ratings map*		Table 42

PD bands		Description
0.030% – 3.844%		Low risk
3.845% – 6.786%		Medium risk
6.787% – 99.99%		High risk
100%		Impaired/Default

This table represents an integral part of our 2022 Annual Consolidated Financial Statements.

Credit risk mitigation


We seek to reduce our exposure to credit risk through a variety of means, including the structuring of transactions and the use of collateral. Structuring of transactions Specific credit policies and procedures set out the requirements for structuring transactions. Risk mitigants include the use of guarantees, collateral, seniority, LTV requirements and covenants. Product-specific guidelines set out appropriate product structuring as well as client and guarantor criteria. Collateral When we advance credit, we often require obligors to pledge collateral as security. The extent of risk mitigation provided by collateral depends on the amount, type and quality of the collateral taken. Specific requirements relating to collateral valuation and management are set out in our credit risk management policies. The types of collateral used to secure credit or trading facilities within the bank are varied. For example, our securities financing and collateralized OTC derivatives activities are primarily secured by cash and highly-rated liquid government and agency securities. Wholesale lending to business clients is often secured by pledges of the assets of the business, such as accounts receivable, inventory, operating assets and commercial real estate. In Canadian Banking and Wealth Management, collateral typically consists of a pledge over a real estate property, or a portfolio of debt securities and equities trading on a recognized exchange. • We employ a risk-based approach to property valuation. Property valuation methods include automated valuation models (AVM) and appraisals. An AVM is a tool that estimates the value of a property by reference to market data including sales of comparable properties and price trends specific to the Metropolitan Statistical Area in which the property being valued is located. Using a risk-based approach, we also employ appraisals which can include drive-by or full on-site appraisals.
• We continue to actively manage our entire mortgage portfolio and perform stress testing, based on a combination of increasing unemployment, rising interest rates and a downturn in real estate markets. • We are compliant with regulatory requirements that govern residential mortgage underwriting practices, including LTV parameters and property valuation requirements.

There were no significant changes regarding our risk management policies on collateral or to the quality of the collateral held during the period.


Credit risk approval The Board, GE, GRC and other senior management committees work together to ensure the ECRMF and supporting policies, processes and procedures exist to manage credit risk and approve related credit risk limits. Reports are provided to the Board, the GRC, and senior executives to keep them informed of our risk profile, including significant credit risk issues, shifts in exposures and trending information, to ensure appropriate and timely actions can be taken where necessary. Our enterprise-wide credit risk policies set out the minimum requirements for the management of credit risk in a variety of borrower, transactional and portfolio management contexts.
Transaction approval Credit transactions are governed by our RBC Enterprise Policy on Risk Limits and Risk Approval Authorities that captures the limits delegated to management and the credit rules policy, which outlines the minimum standards for managing credit risk at the individual client relationship and/or transaction level. The credit rules policy is further supported by business and/or product-specific policies and guidelines as appropriate. Transaction approvals are subject to delegated risk approval authorities. If a transaction exceeds senior management’s authorities, the approval of the Risk Committee of the Board is required.
Product approval Proposals for credit products and services are comprehensively reviewed and approved under a risk assessment framework and are subject to risk approval authorities which increase as the level of risk increases. New and amended products must be reviewed relative to all risk drivers, including credit risk. All existing products must be reviewed following a risk-based assessment approach on a regular basis. Credit risk limits • The allocation of risk appetite and Board delegated authorities are supported by the establishment of risk limits which take into account both regulatory constraints and internal risk management judgment. Risk limits are established at the following levels: single name limits, regional, country and industrial sector limits (notional and economic capital), regulatory large exposure limits, product and portfolio limits, and underwriting and distribution risk limits. These limits apply across all businesses, portfolios, transactions and products. • We actively manage credit exposures and limits to ensure alignment with our risk appetite, to maintain our target business mix and to ensure that there is no undue concentration risk. • Concentration risk is defined as the risk arising from large exposures that are highly correlated such that their ability to meet contractual obligations could be similarly affected by changes in economic, political or other risk drivers. • Credit concentration limits are reviewed on a regular basis after taking into account business, economic, financial and regulatory environments.

Market risk

Market risk is defined to be the impact of market prices upon our financial condition. This includes potential gains or losses due to changes in market determined variables such as interest rates, credit spreads, equity prices, commodity prices, foreign exchange rates and implied volatilities.

Market risk controls – FVTPL positions

As an element of the ERAF, the Board approves our overall market risk constraints. GRM creates and manages the control structure for FVTPL positions which ensures that business is conducted on a basis consistent with Board requirements. The Market and Counterparty Credit Risk function within GRM is responsible for creating and managing the controls and governance procedures that ensure that risk taken is consistent with risk appetite constraints set by the Board. These controls include limits on probabilistic measures of potential loss such as

Value-at-Risk,

Stressed

Value-at-Risk,

Incremental Risk Charge and stress tests as defined below:

Value-at-Risk

(VaR)

is a statistical measure of potential loss for a financial portfolio computed at a given level of confidence and over a defined holding period. We measure VaR at the 99th percentile confidence level for price movements over a

one-day

holding period using historic simulation of the last two years of equally weighted historic market data. These calculations are updated daily with current risk positions, with the exception of certain less material positions that are not actively traded and are updated on at least a monthly basis.

Stressed

Value-at-Risk

(SVaR)

is calculated in an identical manner as VaR with the exception that it is computed using a fixed historical

one-year

period of extreme volatility and its inverse rather than the most recent

two-year

history. The stress period used is a

one-year

period covering the market volatility observed during Q2 2020. SVaR is calculated daily for all portfolios, with the exception of certain less material positions that are not actively traded and are updated on at least a monthly basis.

VaR and SVaR are statistical estimates based on historical market data and should be interpreted with knowledge of their limitations, which include the following:

• VaR and SVaR will not be predictive of future losses if the realized market movements differ significantly from the historical periods used to compute them.

• VaR and SVaR project potential losses over a

one-day

holding period and do not project potential losses for risk positions held over longer time periods.

• VaR and SVaR are measured using positions at close of business and do not include the impact of trading and hedging activity over the course of a day.

We validate our VaR and SVaR measures through a variety of means – including subjecting the models to vetting and validation by a group independent of the model developers and by back-testing the VaR against daily

marked-to-market

revenue to identify and examine events in which actual outcomes in trading revenue exceed the VaR projections.

Incremental Risk Charge (IRC)

captures the risk of losses under default or rating changes for issuers of certain traded fixed income instruments. IRC is measured over a one year horizon at a 99.9% confidence level, and captures different liquidity horizons for instruments and concentrations in issuers under a constant level of risk assumption. Changes in measured risk levels are primarily associated with changes in inventory from the applicable fixed income trading portfolios.

Stress tests

– Our market risk stress testing program is used to identify and control risk due to large changes in market prices and rates. We conduct stress testing daily on positions that are

marked-to-market.

The stress tests simulate both historical and hypothetical events which are severe and long-term in duration. Historical scenarios are taken from actual market events and range in duration up to 90 days. Examples include the

OVID-19

Pandemic of 2020, Global Financial Crisis of 2008 and the Taper Tantrum of 2013. Hypothetical scenarios are designed to be forward-looking at potential future market stresses, and are designed to be severe but plausible. We are constantly evaluating and refining these scenarios as market conditions change. Stress results are calculated assuming an instantaneous revaluation of our positions with no management action.

Market risk measures – FVTPL positions


Market risk measures*		Table 50


	October 31, 2022										October 31, 2021
				For the year ended										For the year ended

(Millions of Canadian dollars)	As at			Average			High		Low		As at			Average			High		Low
Equity	$	45		$	34		$	51	$	21	$	24		$	20		$	38	$	12
Foreign exchange		3			4			7		1		4			4			6		2
Commodities		6			5			6		3		3			3			4		2
Interest rate (1)		47			34			62		17		61			44			64		21
Credit specific (2)		5			7			10		4		9			8			11		6
Diversification (3)		(47	)		(31	)		n.m.		n.m.		(51	)		(35	)		n.m.		n.m.
Market risk VaR (4)	$	59		$	53		$	87	$	34	$	50		$	44		$	72	$	23
Market risk Stressed VaR (4)	$	192		$	103		$	226	$	47	$	59		$	53		$	101	$	29

This table represents an integral part of our 2022 Annual Consolidated Financial Statements.

(1)

General credit spread risk and funding spread risk associated with uncollateralized derivatives are included under interest rate VaR.

(2)

Credit specific risk captures issuer-specific credit spread volatility.

(3)

Market risk VaR is less than the sum of the individual risk factor VaR results due to risk factor diversification.

(4)

The average market risk VaR and average SVaR for the year ended October 31, 2022 includes $11 million and $36 million, respectively (October 31, 2021 – $13 million and $15 million), related to loan underwriting commitments.

n.m.

not meaningful

Market risk controls – Interest Rate Risk in the Banking Book (IRRBB) positions

IRRBB arises primarily from traditional customer-originated banking products such as deposits and loans, and includes related hedges and interest rate risk from securities held for liquidity management purposes. Factors contributing to IRRBB include mismatches between asset and liability repricing dates, relative changes in asset and liability rates in response to market rate scenarios, and other product features affecting the expected timing of cash flows, such as options to

pre-pay

loans or redeem term deposits prior to contractual maturity. IRRBB sensitivities are regularly measured and reported, and subject to limits and controls with independent oversight from GRM.

The Board approves the risk appetite for IRRBB, and the Asset-Liability Committee (ALCO) and GRM provide ongoing governance through IRRBB risk policies, limits, operating standards and other controls. IRRBB reports are reviewed regularly by GRM, ALCO, the GRC, the Risk Committee of the Board and the Board.

IRRBB measurement

To monitor and control IRRBB, we assess two primary metrics, Net Interest Income (NII) risk and Economic Value of Equity (EVE) risk, under a range of market shocks, scenarios, and time horizons. Market scenarios include currency-specific parallel and

non-parallel

yield curve changes, interest rate volatility shocks, and interest rate scenarios prescribed by regulators.

In measuring NII risk, detailed banking book balance sheets and income statements are dynamically simulated to estimate the impact of market stress scenarios on projected NII. Assets, liabilities and

off-balance

sheet positions are simulated over various time horizons. The simulations incorporate maturities, renewals, and new originations along with prepayment and redemption behaviour. Product pricing and volumes are forecasted based on past experience to determine response expectations for a given market shock scenario. EVE risk captures the market value sensitivity to changes in rates. In measuring EVE risk, deterministic (single-scenario) and stochastic (multiple-scenario) valuation techniques are applied to spot position data. NII and EVE risks are measured for a range of market risk stress scenarios which include extreme but plausible changes in market rates and volatilities. IRRBB measures assume continuation of existing hedge strategies.

Management of NII and EVE risk is complementary and supports our efforts to generate a sustainable high-quality NII stream. NII and EVE risks for specific units are measured daily, weekly or monthly depending on materiality, complexity and hedge strategy.

A number of assumptions affecting cash flows, product

re-pricing

and the administration of rates underlie the models used to measure NII and EVE risk. The key assumptions pertain to the projected funding date of mortgage rate commitments, fixed-rate loan prepayment behaviour, term deposit redemption behaviour, and the term and rate profile of

non-maturity

deposits. All assumptions are derived empirically based on historical client behaviour and product pricing with consideration of possible forward-looking changes. All models and assumptions used to measure IRRBB are subject to independent oversight by GRM.

Market risk measures – IRRBB Sensitivities

The following table shows the potential

before-tax

impact of an immediate and sustained 100 bps increase or decrease in interest rates on projected

12-month

NII and EVE, assuming no subsequent hedging. Rate floors are applied within the declining rate scenarios to prevent EVE valuation and NII simulation market rate levels from falling below a minimum average level of negative 25 bps across major currencies. Interest rate risk measures are based on current on and

off-balance

sheet positions which can change over time in response to business activity and management actions.


Market risk – IRRBB measures*		Table 51


	October 31 2022																		October 31 2021
	EVE risk									NII risk (1)

(Millions of Canadian dollars)	Canadian dollar impact			U.S. dollar impact			Total			Canadian dollar impact			U.S. dollar impact			Total			EVE risk			NII risk (1)
Before-tax impact of:
100 bps increase in rates	$	(1,332	)	$	(568	)	$	(1,900	)	$	547		$	234		$	781		$	(2,009	)	$	929
100 bps decrease in rates		1,269			440			1,709			(598	)		(241	)		(839	)		1,537			(921	)

This table represents an integral part of our 2022 Annual Consolidated Financial Statements.

(1)

Represents the

12-month

NII exposure to an instantaneous and sustained shift in interest rates.

Non-trading

foreign exchange rate risk

Foreign exchange rate risk is the potential adverse impact on earnings and economic value due to changes in foreign currency rates. Our revenue, expenses and income denominated in currencies other than the Canadian dollar are subject to fluctuations as a result of changes in the value of the average Canadian dollar relative to the average value of those currencies. Our most significant exposure is to the U.S. dollar, due to our operations in the U.S. and other activities conducted in U.S. dollars. Other significant exposures are to the British pound and the Euro, due to our activities conducted internationally in these currencies. A strengthening or weakening of the Canadian dollar compared to the U.S. dollar, British pound and the Euro could reduce or increase, as applicable, the translated value of our foreign currency denominated revenue, expenses and earnings and could have a significant effect on the results of our operations. We are also exposed to foreign exchange rate risk arising from our investments in foreign operations. For unhedged equity investments, when the Canadian dollar appreciates against other currencies, the unrealized translation losses on net foreign investments decreases our shareholders’ equity through the other components of equity and decreases the translated value of the RWA of the foreign currency-denominated asset. The reverse is true when the Canadian dollar depreciates against other currencies. Consequently, we consider these impacts in selecting an appropriate level of our investments in foreign operations to be hedged.

Liquidity and funding risk

Liquidity and funding risk (liquidity risk) is the risk that we may be unable to generate sufficient cash or its equivalents in a timely and cost-effective manner to meet our commitments. Liquidity risk arises from mismatches in the timing and value of

on-balance

sheet and

off-balance

sheet cash flows.

Our liquidity profile is structured to ensure that we have sufficient liquidity to satisfy current and prospective commitments in both normal and stressed conditions. To achieve this goal, we operate under a comprehensive Liquidity Risk Management Framework (LRMF) and Pledging Policy. We also employ several liquidity risk mitigation strategies that include:

• Achieving an appropriate balance between the level of exposure allowed under our risk appetite and the cost of risk mitigation;

• Maintaining broad funding access, including preserving and promoting a reliable base of core client deposits and ongoing access to diversified wholesale funding sources;

• A comprehensive liquidity stress testing program, contingency, recovery and resolution planning and status monitoring to ensure sufficiency of unencumbered marketable securities and demonstrated capacity to monetize specific asset classes;

• Governance of pledging activity through limits and liquid asset buffers for potential pledging activity;

• Timely and granular risk measurement information;

• Transparent liquidity transfer pricing and cost allocation; and

• Our three lines of defense governance model.

Risk control

Our liquidity risk objectives, policies, models and methodologies are reviewed regularly, and are updated to reflect changing market conditions and business mix. This includes aligning with local regulatory developments. We continue to maintain liquidity and funding that is appropriate for the execution of our strategy. Liquidity risk remains well within our risk appetite.

The Board annually approves the enterprise liquidity risk appetite recommended by the Risk Committee of the Board. The Risk Committee of the Board reviews and recommends the liquidity risk appetite and approves the LRMF. The Board, the Risk Committee of the Board, the GRC and the ALCO regularly review reporting on our consolidated liquidity position. The GRC, the Policy Review Committee (PRC) and/or the ALCO also review liquidity documents prepared for the Board or its committees.

•

The PRC approves the Liquidity Risk Policy, which establishes minimum risk control elements in accordance with the Board-approved risk appetite and the LRMF, and the Pledging Policy, which outlines the requirements and authorities for the management of our pledging activities.

•

The ALCO annually approves the Enterprise Liquidity Contingency Plan (ELCP) and provides strategic direction and oversight to Corporate Treasury, other functions, and business segments on the management of liquidity.

These policies are supported by operational, desk and product-level policies that implement risk control elements, such as parameters, methodologies, management limits and authorities that govern the measurement and management of liquidity. Stress testing is also employed to assess the robustness of the control framework and inform liquidity contingency plans.

Risk measurement

Liquidity risk is measured by applying scenario-specific assumptions against our assets and liabilities and

off-balance

sheet commitments to derive expected cash flow profiles over varying time horizons. For example, government bonds generally can be quickly and easily converted to cash without significant loss of value regardless of their contractual maturity. Similarly, while relationship-based deposits contractually can be withdrawn immediately, in practice, these balances can be relatively stable sources of funding depending on several factors, such as the nature of the client and their intended use. Risk methodologies and underlying assumptions are periodically reviewed and validated to ensure their alignment with our operating environment, expected economic and market conditions, rating agency preferences, regulatory requirements and generally accepted industry practices.

To manage liquidity risk within our liquidity risk appetite, we set limits on various metrics reflecting a range of time horizons and severity of stress conditions and develop contingency, recovery and resolution plans. Our liquidity risk measurement and control activities are divided into three categories as follows:

Structural (longer-term) liquidity risk

To guide our secured and unsecured wholesale term funding activities, we employ both internal and regulatory metrics to manage and control the structural alignment between long-term illiquid assets and longer-term funding sourced from wholesale investors and core relationship deposits.

Tactical (shorter-term) liquidity risk

To address potential immediate cash flow risks in times of stress, we use short-term net cash flow limits to control risk of material units, subsidiaries and currencies, and perform stress testing assessments. Net cash flow positions are determined by applying internally-derived risk assumptions and parameters to known and anticipated cash flows for all material unencumbered assets, liabilities and

off-balance

sheet activities. Encumbered assets are not considered a source of available liquidity. We also control tactical liquidity by adhering to relevant regulatory standards, such as LCR.

Contingency liquidity risk

Contingency liquidity risk planning assesses the impact of sudden stress events and our planned responses. Our ELCP, maintained and administered by Corporate Treasury, has been developed to guide our potential responses to liquidity crises. Under leadership of Corporate Treasury, both enterprise and regional Liquidity Crisis Teams (LCT) meet regularly to assess our liquidity status, approve the ELCP, and in times of stress provide valuable linkages to front line and risk functions to support the crisis management process. LCT’s include members from key business segments, GRM, Finance, Operations, and Communications with relevant subject matter expertise.

Funding

Funding strategy

Core funding, comprising capital, longer-term wholesale liabilities and a diversified pool of personal and, to a lesser extent, commercial and institutional deposits, is the foundation of our structural liquidity position.

We primarily use residential mortgage and credit card securitization programs as alternative sources of funding and for liquidity and asset/liability management purposes. Our total secured long-term funding includes outstanding MBS sold, covered bonds that are collateralized with residential mortgages and securities backed by credit card receivables.


Long-term funding sources* (1)		Table 55



	As at
(Millions of Canadian dollars)	October 31 2022		October 31 2021

Unsecured long-term funding	$	119,241	$	89,447
Secured long-term funding		68,953		56,688
Subordinated debentures		10,639		9,620
	$	198,833	$	155,755

This table represents an integral part of our 2022 Annual Consolidated Financial Statements.

(1)

Based on original term to maturity greater than 1 year.

We also raise long-term funding using Canadian Senior Notes, Canadian National Housing Act MBS, Canada Mortgage Bonds, credit card receivable-backed securities, Kangaroo Bonds (issued in the Australian domestic market by foreign firms) and Yankee Certificates of Deposit (issued in the U.S. domestic market by foreign firms).

Contractual maturities of financial liabilities and

off-balance

sheet items – undiscounted basis

The following tables provide remaining contractual maturity analysis of our financial liabilities and

off-balance

sheet items. The amounts disclosed in the following table are the contractual undiscounted cash flows of all financial liabilities (e.g., par value or amount payable upon maturity). The amounts do not reconcile directly with those in our consolidated balance sheets as the table incorporates only cash flows relating to payments on maturity and do not recognize premiums, discounts or

mark-to-market

adjustments recognized in the instruments’ carrying values as at the balance sheet date. Financial liabilities are based upon the earliest period in which they are required to be paid. For

off-balance

sheet items, the undiscounted cash flows potentially payable under financial guarantees and commitments to extend credit are classified on the basis of the earliest date they can be called.


Contractual maturities of financial liabilities and off-balance sheet items – undiscounted basis*		Table 63


	As at October 31, 2022
(Millions of Canadian dollars)	On demand		Within 1 year		1 year to 2 years		2 years to 5 years		5 years and greater		Total
Financial liabilities
Deposits (1)	$	562,288	$	463,711	$	50,169	$	106,568	$	37,260	$	1,219,996
Other
Acceptances		–		17,872		–		–		–		17,872
Obligations related to securities sold short		–		35,395		–		–		–		35,395
Obligations related to assets sold under repurchase agreements and securities loaned		16,367		256,756		948		–		–		274,071
Other liabilities		508		61,420		220		709		9,191		72,048
Lease liabilities		–		654		630		1,609		2,217		5,110
Subordinated debentures		–		110		–		1,884		8,042		10,036
		579,163		835,918		51,967		110,770		56,710		1,634,528
Off-balance sheet items
Financial guarantees (2)	$	20,289	$	2	$	–	$	–	$	–	$	20,291
Other commitments (3)		–		73		60		136		187		456
Commitments to extend credit (2)		284,606		48,573		1		36		–		333,216
		304,895		48,648		61		172		187		353,963
Total financial liabilities and off-balance sheet items	$	884,058	$	884,566	$	52,028	$	110,942	$	56,897	$	1,988,491

	As at October 31, 2021
(Millions of Canadian dollars)	On demand		Within 1 year		1 year to 2 years		2 years to 5 years		5 years and greater		Total
Financial liabilities
Deposits (1)	$	576,161	$	367,389	$	44,951	$	78,071	$	33,063	$	1,099,635
Other
Acceptances		1		19,867		5		–		–		19,873
Obligations related to securities sold short		–		37,462		–		–		–		37,462
Obligations related to assets sold under repurchase agreements and securities loaned		19,234		242,314		669		–		–		262,217
Other liabilities		620		35,984		384		544		7,873		45,405
Lease liabilities		–		631		582		1,522		2,342		5,077
Subordinated debentures		–		188		110		1,916		7,392		9,606
		596,016		703,835		46,701		82,053		50,670		1,479,275
Off-balance sheet items
Financial guarantees (2)	$	16,867	$	–	$	–	$	–	$	–	$	16,867
Other commitments (3)		–		81		82		209		344		716
Commitments to extend credit (2)		248,594		41,238		77		2		–		289,911
		265,461		41,319		159		211		344		307,494
Total financial liabilities and off-balance sheet items	$	861,477	$	745,154	$	46,860	$	82,264	$	51,014	$	1,786,769

This table represents an integral part of our 2022 Annual Consolidated Financial Statements.

(1)

A major portion of relationship-based deposits are repayable on demand or at short notice on a contractual basis while, in practice, these customer balances form a core base for our operations and liquidity needs, as explained in the preceding Deposit and funding profile.

(2)

We believe that it is highly unlikely that all or substantially all of these guarantees and commitments will be drawn or settled within one year, and contracts may expire without being drawn or settled. The management of the liquidity risk associated with potential extensions of funds is outlined in the preceding Risk measurement section.

(3)

Includes commitments related to short-term and

low-dollar

value leases, leases not yet commenced, and lease payments related to

non-recoverable

tax.