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Printmgr File Glossary Acceptances Bank-owned life insurance contracts (BOLI) Common Equity Tier 1 capital ratio A bill of exchange or negotiable instrument Our legacy portfolio includes BOLI where we CET1 capital less regulatory adjustments or drawn by the borrower for payment at maturity provided banks with BOLI stable value deductions divided by risk-weighted assets. and accepted by a bank. The acceptance agreements (“wraps”), which insure the life constitutes a guarantee of payment by the bank insurance policy’s cash surrender value from Covered bonds and can be traded in the money market. The market fluctuations on the underlying Full recourse on-balance sheet obligations bank earns a “stamping fee” for providing this investments, thereby allowing us to guarantee issued by banks and credit institutions that are guarantee. a minimum tax-exempt return to the counter- also fully collateralized by assets over which party. These wraps allow us to account for the investors enjoy a priority claim in the event of Allowance for credit losses underlying assets on an accrual basis instead an issuer’s insolvency. The amount deemed adequate by management of a mark-to-market basis. to absorb identified credit losses as well as Credit default swaps (CDS) losses that have been incurred but are not yet Basis point (bp) A derivative contract that provides the identifiable as at the balance sheet date. This One one-hundredth of a percentage point purchaser with a one-time payment should the allowance is established to cover the lending (.01%). referenced entity/entities default (or a similar portfolio including loans, acceptances, triggering event occur). guarantees, letters of credit, and unfunded Capital adequacy commitments. The allowance is increased by The level of capital that is sufficient to underpin the provision for credit losses, which is charged Derivative risk and accommodate potential unexpected A contract between two parties, which requires to income and decreased by the amount of increases in risk within specified regulatory write-offs, net of recoveries in the period. little or no initial investment and where targets while maintaining our business plans. payments between the parties are dependent This includes risks for which minimum upon the movements in price of an underlying Alt-A assets regulatory capital requirements may not be instrument, index or financial rate. Examples of A term used in the U.S. to describe assets specified. derivatives include swaps, options, forward (mainly mortgages) with a borrower risk profile rate agreements and futures. The notional between the prime and subprime catego- Collateral amount of the derivative is the contract amount rizations. Categorization of assets as Alt-A (as Assets pledged as security for a loan or other used as a reference point to calculate the opposed to prime) varies, such as limited obligation. Collateral can take many forms, payments to be exchanged between the two verification or documentation of borrowers’ such as cash, highly rated securities, property, parties, and the notional amount itself is income or a limited credit history. inventory, equipment and receivables. generally not exchanged by the parties. Asset-backed securities (ABS) Collateralized debt obligation (CDO) Dividend payout ratio Securities created through the securitization of Securities with multiple tranches that are Common dividends as a percentage of net a pool of assets, for example auto loans or issued by special purpose entities and income after preferred share dividends. credit card loans. collateralized by debt obligations including bonds and loans. Each tranche offers a varying Earnings per share (EPS), basic Assets-to-capital multiple degree of risk and return so as to meet investor Calculated as net income less preferred share Total assets plus specified off-balance sheet demand. dividends divided by the average number of items, as defined by OSFI, divided by total shares outstanding. regulatory capital. Collateralized loan obligation (CLO) Securities that are backed by a pool of Earnings per share (EPS), diluted Assets under administration (AUA) commercial or personal loans, structured so Calculated as net income less preferred share Assets administered by us, which are benefi- that there are several classes of bonds with dividends divided by the average number of cially owned by clients, as at October 31, varying maturities, called tranches. shares outstanding adjusted for the dilutive unless otherwise noted. Services provided in effects of stock options and other convertible respect of assets under administration are of Commercial mortgage-backed securities securities. an administrative nature, including (CMBS) safekeeping, collecting investment income, Securities created through the securitization of Economic capital settling purchase and sale transactions, and commercial mortgages. record keeping. An estimate of the amount of equity capital required to underpin risks. It is calculated by Commitments to extend credit estimating the level of capital that is necessary Assets under management (AUM) Unutilized amount of credit facilities available to support our various businesses, given their Assets managed by us, which are beneficially to clients either in the form of loans, bankers’ risks, consistent with our desired solvency owned by clients, as at October 31, unless acceptances and other on-balance sheet standard and credit ratings. The identified risks otherwise noted. Services provided in respect financing, or through off-balance sheet products for which we calculate Economic Capital are of assets under management include the such as guarantees and letters of credit. credit, market (trading and non-trading), selection of investments and the provision of operational, business, fixed asset, and investment advice. We have assets under insurance. Additionally, Economic Capital Common Equity Tier 1 (CET1) capital management that are also administered by us includes goodwill and intangibles, and allows and included in assets under administration. The sum of common shares issued that meet regulatory criteria, share premium from the for diversification benefits across risks and issuances and other contributed surplus, business segments. Auction rate securities (ARS) retained earnings, accumulated other Securities issued through special purpose comprehensive income and other disclosed Fair value entities that hold long-term assets funded with reserves, and common shares issued by The amount of consideration that would be long-term debt. In the U.S., these securities are consolidated subsidiaries held by third parties; agreed upon in an arm’s length transaction issued by sponsors such as municipalities, less dividends removed from CET1 in between knowledgeable, willing parties who student loan authorities or other sponsors accordance with applicable accounting are under no compulsion to act. through bank-managed auctions. standards. Glossary Royal Bank of Canada: Annual Report 2013 183 Gross-adjusted assets (GAA) Loan-to-value (LTV) ratio Provision for credit losses (PCL) GAA are used in the calculation of the Assets- Calculated based on the total facility amount The amount charged to income necessary to to-capital multiple. They represent our total for the residential mortgage and homeline bring the allowance for credit losses to a level assets including specified off-balance sheet product divided by the value of the related determined appropriate by management. This items and net of prescribed deductions. Off residential property. includes both specific and general provisions. balance sheet items for this calculation are direct credit substitutes, including letters of Master netting agreement Repurchase agreements credit and guarantees, transaction-related An agreement between us and a counterparty These involve the sale of securities for cash and contingencies, trade-related contingencies and designed to reduce the credit risk of multiple the simultaneous repurchase of the securities sale and repurchase agreements. derivative transactions through the creation of for value at a later date. These transactions a legal right of offset of exposure in the event of normally do not constitute economic sales and Guarantees and standby letters of credit a default. therefore are treated as collateralized financing These primarily represent irrevocable transactions. assurances that a bank will make payments in Net interest income the event that its client cannot meet its The difference between what is earned on Residential mortgage-backed securities financial obligations to third parties. Certain assets such as loans and securities and what is (RMBS) other guarantees, such as bid and performance paid on liabilities such as deposits and Securities created through the securitization of bonds, represent non-financial undertakings. subordinated debentures. residential mortgage loans. Hedge Net interest margin (average assets) Return on common equity (ROE) A risk management technique used to mitigate Net interest income as a percentage of total Net income less preferred share dividends, exposure from market, interest rate or foreign average assets. expressed as a percentage of average common currency exchange risk arising from normal equity. banking operations. The elimination or reduction of such exposure is accomplished by Normal course issuer bid (NCIB) establishing offsetting positions. For example, A program for the repurchase of our own shares Reverse repurchase agreements assets denominated in foreign
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