40-F - RY - Equibles

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 40-F

[Check one]

☐ REGISTRATION STATEMENT PURSUANT TO SECTION 12 OF THE SECURITIES EXCHANGE ACT OF 1934

☒ ANNUAL REPORT PURSUANT TO SECTION 13(a) OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended October 31, 2021	Commission File Number <br>001-13928

ROYAL BANK OF CANADA

(Exact name of Registrant as specified in its charter)

Canada	6029	Not Applicable
(Province or other jurisdiction of<br><br>incorporation or organization)	(Primary Standard Industrial<br><br>Classification Code Number)	(I.R.S. Employer Identification<br><br>Number (if applicable))

200 Bay Street

Royal Bank Plaza

Toronto, Ontario

Canada M5J 2J5

Attention: Karen E. McCarthy

Senior Vice President, Associate General Counsel & Secretary

(416) 974-6715

(Address and telephone number of Registrant’s principal executive offices)

Royal Bank of Canada

30 Hudson Street

Jersey City, New Jersey, 07302

Attention: Matthew Abrusci

Vice President & Associate General Counsel

(212) 437-9267

(Name, address (including zip code) and telephone number (including area code)

of agent for service in the United States)

copies of all correspondence should be sent to:

Josie Caldas<br><br>Royal Bank of Canada<br><br>200 Bay Street<br><br>Toronto, Ontario<br><br>Canada M5J 2J5<br><br>Tel: (416) <br>974-0446	Donald R. Crawshaw<br><br>Sullivan & Cromwell LLP<br><br>125 Broad Street<br><br>New York, New York<br><br>USA 10004-2498<br><br>Tel: (212) <br>558-4000

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Securities registered or to be registered pursuant to Section 12(b) of the Act.

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Shares	RY	New York Stock Exchange

Securities registered or to be registered pursuant to Section 12(g) of the Act.

Not Applicable
(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

Not Applicable
(Title of Class)

For annual reports, indicate by check mark the information filed with this Form:

☒ Annual information form ☒ Audited annual financial statements

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

Common Shares	1,425,187,410
First Preferred Shares
Series AZ	20,000,000
Series BB	20,000,000
Series BD	24,000,000
Series BF	12,000,000
Series BH	6,000,000
Series BI	6,000,000
Series BJ	6,000,000
Series BO	14,000,000
Series BQ	1,750,000*
Series BR	1,250,000*
Series BS	1,000,000*
Series BT	750,000**
Series <br>C-2	15,385

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).

Yes ☒ No ☐

*In connection with the issuance of Limited Recourse Capital Notes (LRCN) Series 1, on July 28, 2020, the Registrant issued $1,750 million of First Preferred Shares Series BQ (Series BQ) at a price of $1,000 per Series BQ. In connection with the issuance of LRCN Series 2, on November 2, 2020, the Registrant issued $1,250 million of First Preferred Shares Series BR (Series BR) at a price of $1,000 per Series BR. In connection with the issuance of LRCN Series 3, on June 8, 2021, the Registrant issued $1,000 million of First Preferred Shares Series BS (Series BS) at a price of $1,000 per Series BS. The Series BQ, Series BR and Series BS were issued to a consolidated trust to be held as trust assets in connection with the LRCN structure.

**The First Preferred Shares Series BT were issued on November 5, 2021 to certain institutional investors.

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Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 12b-2 of the Exchange Act.

Emerging growth company ☐

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.	☐
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.	☒

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CONTROLS AND PROCEDURES

Information about disclosure controls and procedures and internal control over financial reporting can be found under “Controls and procedures” on page 112 of our Management’s Discussion and Analysis set forth in Exhibit 2, and under “Management’s Report on Internal Control over Financial Reporting” which can be found on page 125 of our Financial Review set forth in Exhibit 2, which sections are incorporated by reference.

AUDIT COMMITTEE FINANCIAL EXPERTS

The Registrant’s board of directors has determined that it has three audit committee financial experts serving on its audit committee. Cynthia Devine, Frank Vettese and Jeffery W. Yabuki have been determined to be such audit committee financial experts and are independent, as that term is defined by the New York Stock Exchange’s listing standards applicable to the Registrant. The U.S. Securities and Exchange Commission (the “SEC”) has indicated that the designation of Cynthia Devine, Frank Vettese and Jeffery W. Yabuki as audit committee financial experts does not make any of them an “expert” for any purpose, impose any duties, obligations or liability on Cynthia Devine, Frank Vettese and Jeffery W. Yabuki that are greater than those imposed on members of the audit committee and board of directors who do not carry this designation or affect the duties, obligations or liability of any other member of the audit committee.

CODE OF ETHICS

The Registrant has adopted a code of ethics (the “Code of Conduct”) that applies to all employees, contract workers and members of the board of directors, including its principal executive officer, principal financial officer and principal accounting officer. In 2021, the Registrant adopted a revised Code of Conduct. Key amendments made to the Code of Conduct included additions related to public endorsements and influencer marketing, and enhancements and clarifications to provisions related to human rights, dealing with clients, communities and others, working together and conflicts of interest. The full text of the Code of Conduct is set forth in Exhibit 4 and is also available on our website at rbc.com.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information about principal accountant fees and services and a brief description of our pre-approval policies and procedures can be found under “Audit Committee” beginning on page 23 of our Annual Information Form set forth in Exhibit 1, which section is incorporated by reference. A copy of our pre-approval policies and procedures can be found in Appendix D of our Annual Information Form, which section is incorporated by reference.

OFF-BALANCE SHEET ARRANGEMENTS

Information about off-balance sheet arrangements can be found under “Off-balance sheet arrangements” beginning on page 50 of our Management’s Discussion and Analysis set forth in Exhibit 2, which section is incorporated by reference.

TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

Tabular disclosure of contractual obligations can be found under “Transactional/positional risk drivers – Liquidity and funding risk” beginning on page 78 of our Management’s Discussion and Analysis set forth in Exhibit 2, which section is incorporated by reference.

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IDENTIFICATION OF THE AUDIT COMMITTEE

The Registrant has a separately-designated standing audit committee. Information about the audit committee can be found under “Audit Committee” beginning on page 23 of our Annual Information Form set forth in Exhibit 1, which section is incorporated by reference.

UNDERTAKING

The Registrant undertakes to make available, in person or by telephone, representatives to respond to inquiries made by the Commission staff, and to furnish promptly, when requested to do so by the Commission staff, information relating to: the securities in relation to which the obligation to file an annual report on Form 40-F arises; or transactions in said securities.

SUMMARY OF SIGNIFICANT DIFFERENCES FROM NYSE CORPORATE GOVERNANCE RULES

A summary of significant ways corporate governance practices followed by the Registrant differ from corporate governance practices required to be followed by U.S. Domestic Companies under the New York Stock Exchange’s listing standards (disclosure required by section 303A.11 of the NYSE Listed Company Manual) is available on the Registrant’s corporate governance website at rbc.com/our-company/governance/index.html.

DISCLOSURE PURSUANT TO SECTION 13(r) OF THE SECURITIES EXCHANGE ACT OF 1934

In accordance with section 13(r) of the U.S. Securities Exchange Act of 1934, we are required to disclose certain Iran-related activities. We maintain a robust economic sanctions compliance program which monitors compliance with economic sanctions requirements in the jurisdictions in which we operate and we believe we have been in compliance with relevant economic sanctions legislation throughout fiscal 2021.

We currently maintain certain non-U.S. dollar denominated accounts for the Embassy of the Islamic Republic of Iran in Canada (the “Iranian Embassy”). Any funds in these accounts are frozen by Ontario court order in connection with civil litigation, which is being monitored.

In fiscal 2021 these accounts generated less than $3,000 in gross revenue and less than $3,000 in net income.

*Information contained in or otherwise accessible through the websites mentioned in this report does not form part of this report. All references to websites are inactive textual references and for your information only.

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SIGNATURES

Pursuant to the requirements of the Exchange Act, the Registrant certifies that it meets all of the requirements for filing on Form 40-F and has duly caused this annual report to be signed on its behalf by the undersigned, thereto duly authorized.

ROYAL BANK OF CANADA
By:	/s/ David I. McKay
Name:	David I. McKay
Title:	President and Chief Executive Officer
Date:	December 1, 2021

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INDEX TO EXHIBITS

Exhibit	Exhibit No.
Royal Bank of Canada Annual Information Form dated November 30, 2021	1
Financial Review	2
• Management’s Discussion and Analysis
• Caution Regarding Forward-Looking Statements
• Management’s Responsibility for Financial Reporting
• Management’s Report on Internal Control over Financial Reporting
• Report of Independent Registered Public Accounting Firm
• Consolidated Financial Statements
Consent of Independent Registered Public Accounting Firm	3
Code of Conduct	4
Industry Guide 3 – Return on Equity and Assets Ratios	5
Rule <br>13a-14(a)/15d-14(a)<br> Certifications	31
• Certification of the Registrant’s Chief Executive Officer<br><br>• Certification of the Registrant’s Chief Financial Officer
Section 1350 Certifications	32
• Certification of the Registrant’s Chief Executive Officer<br><br>• Certification of the Registrant’s Chief Financial Officer
Interactive Data File (formatted as Inline XBRL)	101
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)	104

EX-1

Exhibit 1

LOGO

ROYAL BANK OF CANADA

ANNUAL

INFORMATION

FORM

November 30, 2021

CAUTION REGARDINGFORWARD-LOOKING STATEMENTS

From time to time, we make written or oral forward-looking statements within the meaning of certain securities laws, including the “safe harbour” provisions of the United States Private Securities Litigation Reform Act of 1995 and any applicable Canadian securities legislation. We may make forward-looking statements in this Annual Information Form and in the documents incorporated by reference herein, in other filings with Canadian regulators or the United States (U.S.) Securities and Exchange Commission (SEC), in reports to shareholders and in other communications. Forward-looking statements in this document and in the documents incorporated by reference herein include, but are not limited to, statements relating to our financial performance objectives, vision and strategic goals, climate related goals, the Economic, market and regulatory review and outlook for Canadian, U.S., European and global economies, the regulatory environment in which we operate, the Strategic priorities and Outlook sections for each of our business segments, the risk environment including our credit risk, market, liquidity and funding risk as set out in the 2021 Management’s Discussion and Analysis for the fiscal year ended October 31, 2021 (the 2021 Management’s Discussion and Analysis), and the potential continued impacts of the coronavirus (COVID-19) pandemic on our business operations, financial results, condition and objectives, and on the global economy and financial market conditions. The forward-looking information contained in this Annual Information Form and in the documents incorporated by reference is presented for the purpose of assisting the holders of our securities and financial analysts in understanding our financial position and results of operations as at and for the periods ended on the dates presented, as well as our financial performance objectives, vision and strategic goals, and may not be appropriate for other purposes. Forward-looking statements are typically identified by words such as “believe”, “expect”, “foresee”, “forecast”, “anticipate”, “intend”, “estimate”, “goal”, “plan” and “project” and similar expressions of future or conditional verbs such as “will”, “may”, “should”, “could” or “would”.

By their very nature, forward-looking statements require us to make assumptions and are subject to inherent risks and uncertainties, which give rise to the possibility that our predictions, forecasts, projections, expectations or conclusions will not prove to be accurate, that our assumptions may not be correct and that our financial performance objectives, vision and strategic goals will not be achieved. We caution readers not to place undue reliance on these statements as a number of risk factors could cause our actual results to differ materially from the expectations expressed in such forward-looking statements. These factors – many of which are beyond our control and the effects of which can be difficult to predict – include: credit, market, liquidity and funding, insurance, operational, regulatory compliance (which could lead to us being subject to various legal and regulatory proceedings, the potential outcome of which could include regulatory restrictions, penalties and fines), strategic, reputation, competitive, legal and regulatory environment, and systemic risks and other risks discussed in the risk sections and Impact of COVID-19 pandemic section of our Annual Report for the fiscal year ended October 31, 2021 (the 2021 Annual Report) including business and economic conditions in the geographic regions in which we operate, information technology and cyber risks, environmental and social risk (including climate change), digital disruption and innovation, Canadian housing and household indebtedness, geopolitical uncertainty, privacy, data and third-party related risks, regulatory changes, culture and conduct, the effects of changes in government fiscal, monetary and other policies, tax risk and transparency, and the emergence of widespread health emergencies or public health crises such as pandemics and epidemics, including the COVID-19 pandemic and its impact on the global economy, financial market conditions and our business operations, and financial results, condition and objectives. As we work to advance our climate goals, external factors outside of RBC’s reasonable control may act as constraints on their achievement, including varying decarbonization efforts across economies, the need for thoughtful climate policies around the world, more and better data, reasonably supported methodologies, technological advancements, the evolution of consumer behaviour, the challenges of balancing interim emissions goals with an orderly and just transition, and other significant considerations such as legal and regulatory obligations.

We caution that the foregoing list of risk factors is not exhaustive and other factors could also adversely affect our results. When relying on our forward-looking statements to make decisions with respect to us, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. Material economic assumptions underlying the forward-looking statements contained in this Annual Information Form are set out in the Economic, market and regulatory review and outlook section and for each business segment under the Strategic priorities and Outlook headings in our 2021 Annual Report. Except as required by law, we do not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by us or on our behalf.

Additional information about these and other factors can be found in the risk sections and Impact of COVID-19 pandemic section of our 2021 Management’s Discussion and Analysis.

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CORPORATE STRUCTURE	1
Name, Address and Incorporation	1
Intercorporate Relationships	1
GENERAL DEVELOPMENT OF THE BUSINESS	1
Three Year History	1	14-17
DESCRIPTION OF THE BUSINESS	2
General Summary	2	14-17, 24-47
Seasonality	3	48-49
Competition	3	24-47
Government Regulation and Supervision – Canada	4
Government Regulation and Supervision – United States	6
Risk Factors	9	17-20, 52-99
Environmental and Social Risk Policies	9	97
DESCRIPTION OF CAPITAL STRUCTURE	10
General Description	10	100-109, 225*
Prior Sales	12	100-109, 205, 205-208
Constraints	13
Ratings	13	84
MARKET FOR SECURITIES	15
Trading Price and Volume	15
DIVIDENDS	17	106-107, 205-208*
SECURITIES SUBJECT TO CONTRACTUAL RESTRICTION ON TRANSFER	18
DIRECTORS AND EXECUTIVE OFFICERS	18
Directors	18
Committees of the Board	19
Executive Officers	20
Ownership of Securities	21
Cease Trade Orders, Bankruptcies, Penalties or Sanctions	21
Conflicts of Interest	22
LEGAL PROCEEDINGS AND REGULATORY ACTIONS	22	215-216*
INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL<br><br><br>TRANSACTIONS	23
TRANSFER AGENT AND REGISTRAR	23
EXPERTS	23
AUDIT COMMITTEE	23
Audit Committee Mandate	23
Composition of Audit Committee	23
Relevant Education and Experience of Audit Committee Members	24
Pre-Approval Policies and Procedures	24
Independent Registered Public Accounting Firm Fees	25
ADDITIONAL INFORMATION	26
TRADEMARKS	26
APPENDIX A – PRINCIPAL SUBSIDIARIES	27
APPENDIX B – EXPLANATION OF RATINGS AND OUTLOOK	28
APPENDIX C – AUDIT COMMITTEE MANDATE	31
APPENDIX D – PRE-APPROVAL POLICIES ANDPROCEDURES	37

*Notes 18, 19, 24 and 32 to the 2021 Annual Consolidated Financial Statements for the fiscal year ended October 31, 2021 (the 2021 Annual Consolidated Financial Statements) for Royal Bank of Canada are incorporated by reference herein.

INFORMATION IS AT OCTOBER 31, 2021, UNLESS OTHERWISE NOTED.

CORPORATE STRUCTURE

Name, Address and Incorporation^1^

Royal Bank of Canada is a Schedule I bank under the Bank Act (Canada), which constitutes its charter. The Bank was created as Merchants Bank in 1864 and was incorporated under the “Act to Incorporate the Merchants’ Bank of Halifax” assented to June 22, 1869. The Bank changed its name to The Royal Bank of Canada in 1901 and to Royal Bank of Canada in 1990.

The Bank’s corporate headquarters are located at Royal Bank Plaza, 200 Bay Street, Toronto, Ontario, Canada and its head office is located at 1 Place Ville-Marie, Montreal, Quebec, Canada.

Intercorporate Relationships

Information about intercorporate relationships with principal subsidiaries, including place of incorporation and percentage of securities owned by the Bank, is provided in Appendix A.

GENERAL DEVELOPMENT OF THE BUSINESS

Three Year History

Our business strategies and actions are guided by our vision, “To be among the world’s most trusted and successful financial institutions.” Our three strategic goals are:

•	In Canada, to be the undisputed leader in financial services;
•	In the U.S., to be the preferred partner to corporate, institutional and high net worth clients and their<br>businesses; and
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•	In select global financial centres, to be a leading financial services partner valued for our expertise.<br>
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In 2019, the Canadian and U.S. economies continued to show growth, and RBC delivered strong results with earnings of $12.9 billion. These results reflected earnings growth in Personal & Commercial Banking and Wealth Management, and solid results in Insurance. These were partially offset by lower earnings in Investor & Treasury Services and in Capital Markets. In 2019, Derek Neldner was appointed to the role of Group Head, Capital Markets and Doug Guzman assumed leadership of Investor & Treasury Services.

2020 was characterized by unprecedented declines in gross domestic product (GDP) and a substantial increase in unemployment as a result of measures to contain the COVID-19 pandemic, which sharply curtailed economic activity globally. In 2020, the Canadian economy contracted and the unemployment rate rose after COVID-19 containment measures led to an unprecedented decline in economic activity in the first half of the calendar year. The U.S. economy also contracted and GDP in the Euro area and the U.K. declined amid the spread of the COVID-19 pandemic and containment measures. Financial markets in 2020 saw government bond yields at historically low levels and monetary policy stimulus and massive government income programs supported equity markets broadly following the market sell-off in March/April 2020.

In 2020, RBC reported net income of $11.4 billion, down 11% from the prior year, reflecting higher provisions for credit losses, as the Bank prudently built reserves given the unprecedented challenges brought on by the COVID-19 pandemic, in addition to the impact of lower interest rates. Lower results in Personal &

^1^ When we say “we”, “us”, “our”, or “RBC”, we mean Royal Bank of Canada and its subsidiaries, as applicable. References to “the Bank” mean Royal Bank of Canada without its subsidiaries.

Commercial Banking and Wealth Management were partially offset by robust earnings in Capital Markets, as well as higher results in Investor & Treasury Services and Insurance.

While the global economic recovery continued in 2021, momentum waned amid ongoing uncertainty regarding the extent and duration of the impacts of the COVID-19 pandemic. The Canadian economy showed growth in 2021 following the contraction in 2020, as provincial economies reopened. Although the unemployment rate remained above pre-pandemic levels, labour markets improved substantially since the onset of the COVID-19 pandemic and household purchasing power continued to be supported by large amounts of savings. Despite substantial improvement, the economy has yet to fully recover from the impacts of the pandemic, particularly in the high-contact and travel service sectors. The U.S. economy also showed growth in 2021, but the pace of the economic recovery slowed over the summer amid ongoing supply chain disruptions and the continued spread of COVID-19 in some regions. Similarly, in the Euro area and the U.K., GDP rose amid the lifting of containment measures across member states. Government bond yields remained low but rose in the latter half of 2021 as the global economic recovery continued and inflation rates rose. Equity markets broadly continued to improve, supported by the positive economic outlook.

In 2021, RBC reported net income of $16.05 billion, up 40% from the prior year, reflecting higher earnings in Personal & Commercial Banking, Capital Markets, Wealth Management, and Insurance, partially offset by lower earnings in Investor & Treasury Services, as well as releases of provisions on performing loans primarily driven by improvements in our macroeconomic and credit quality outlook. In comparison, the prior year reflected elevated provisions on performing loans of $2.6 billion due to the impact of the COVID-19 pandemic.

2021 also saw the appointments of Nadine Ahn to the role of Chief Financial Officer and Maria Douvas to the role of Chief Legal Officer. Neil McLaughlin also assumed responsibility for RBC Ventures.

We continue to monitor and prepare for regulatory developments and changes in a manner that seeks to ensure compliance with new requirements, while mitigating adverse business or financial impacts. Such impacts could result from new or amended laws or regulations and the expectations of those who enforce them. A high level summary of the key regulatory changes that have the potential to increase or decrease our costs and the complexity of our operations is included in the Legal and regulatory environment risk section of our 2021 Annual Report. A summary of the additional regulatory changes instituted by governments globally and by the Office of the Superintendent of Financial Institutions (OSFI) in response to the COVID-19 pandemic are included in the Impact of COVID-19 pandemic and Capital management sections of our 2021 Annual Report. For a discussion on risk factors resulting from these and other developments which may affect our business and financial results, refer to the risks sections of our 2021 Annual Report. For further details on our framework and activities to manage risks, refer to the Impact of COVID-19 pandemic, risk and Capital management sections of our 2021 Annual Report.

Additional information can also be found under “Overview and outlook” beginning on page 14 of our 2021 Management’s Discussion and Analysis, which section is incorporated by reference herein.

DESCRIPTION OF THE BUSINESS

General Summary

Royal Bank of Canada is a global financial institution with a purpose-driven, principles-led approach to delivering leading performance. Our success comes from the 87,000+ employees who leverage their imaginations and insights to bring our vision, values and strategy to life so we can help our clients thrive and communities prosper. As Canada’s biggest bank, and one of the largest in the world based on market capitalization, we have a diversified business model with a focus on innovation and providing exceptional experiences to our 17 million clients in Canada, the U.S. and 27 other countries.

Our business segments are Personal & Commercial Banking, Wealth Management, Insurance, Investor & Treasury Services and Capital Markets. Our business segments are supported by Corporate Support. Additional information about our business and each segment (including segment results) can be found under “Overview and outlook” beginning on page 14 and under “Business segment results” beginning on page 24 of our 2021 Management’s Discussion and Analysis, which sections are incorporated by reference herein.

Seasonality

Information about seasonality is provided under “Quarterly results and trend analysis” on page 48 of our 2021 Management’s Discussion and Analysis, which section is incorporated by reference herein.

Competition

Our competition in Personal & Commercial Banking includes other Schedule 1 banks, independent trust companies, foreign banks, credit unions, caisses populaires and auto financing companies, in Canada; other banks, trust companies and investment management companies serving retail and corporate clients, as well as public institutions, in the Caribbean; and other Canadian banking institutions that have U.S. operations, in the U.S.

Our Canadian Wealth Management business competes with domestic banks and trust companies, investment counselling firms, bank-owned full-service brokerages and boutique brokerages, mutual fund companies, and global private banks. In Canada, bank-owned wealth managers continue to be the major players. Our U.S. Wealth Management business (including City National) operates in a fragmented and highly competitive industry and competition includes other broker-dealers, commercial banks and other financial institutions that service high net worth and ultra-high net worth individuals, entrepreneurs and their businesses. Our Global Asset Management business faces competition in Canada from banks, insurance companies and asset management organizations; in the U.S. from independent asset management firms, as well as those that are part of national and international banks and insurance companies; and internationally from asset managers that are owned by international banks, as well as national and regional asset managers in the geographies where we serve clients. Competitors to our International Wealth Management business include global wealth managers, traditional offshore private banks and domestic wealth managers.

In our Canadian Insurance business, many of our competitors specialize in life and health or property and casualty products. In our International Insurance business we compete in the global reinsurance market which is competitive and reflects significant market share in the U.S., U.K., and Europe being held by a small number of reinsurers.

Our Investor & Treasury Services business competes against the world’s largest global custodians in selected countries in North America, Europe, the U.K., and Asia-Pacific.

Our Capital Markets business is a market leader in Canada and competes with large global investment banks in the U.S. Outside North America, we have a targeted presence in the U.K. and Europe, Australia, Asia and other markets aligned with our global expertise.

Additional information about our competition can be found under “Business segment results” beginning on page 24 of our 2021 Management’s Discussion and Analysis, which section is incorporated by reference herein.

Government Regulation and Supervision – Canada

The Bank is a “Schedule I” bank under the Bank Act (Canada) (Bank Act), and, as such, is a federally regulated financial institution. It has Canadian insurance and trust and loan company subsidiaries that are also federally regulated financial institutions (FRFI Subsidiaries and, together with the Bank, FRFIs) governed by (respectively) the Insurance Companies Act (Canada) and the Trust and Loan Companies Act (Canada). The activities of the FRFI Subsidiaries are also regulated under provincial and territorial laws in respect of their activities in the provinces and territories. In certain provinces, some of the Bank’s capital markets and wealth management activities are regulated under provincial securities laws (which are administered and enforced by securities regulatory authorities).

OSFI, an independent agency of the Government of Canada, reports to the Minister of Finance (the Minister) for the supervision of the FRFIs. OSFI is required, at least once a year, to examine the affairs and business of each FRFI for the purpose of determining whether the FRFI is complying with the provisions of its governing statute and it is in sound financial condition, and report to the Minister. The FRFIs are also required to make periodic filings and reports to OSFI.

The FRFIs are also subject to regulation under the Financial Consumer Agency ofCanada Act (FCAC Act).^2^ The Financial Consumer Agency of Canada (Agency), among other things, enforces consumer-related provisions of the federal statutes which govern these financial institutions. The Commissioner of the Agency must report to the Minister on all matters connected with the administration of the FCAC Act and consumer provisions of other federal statutes, including the Bank Act, Trust and LoanCompanies Act and Insurance Companies Act. The FRFIs are also subject to provincial and territorial laws of general application.

The Bank and the following subsidiaries are member institutions of the Canada Deposit Insurance Corporation (CDIC): Royal Trust Corporation of Canada, The Royal Trust Company, Royal Bank Mortgage Corporation and RBC Investor Services Trust. CDIC insures certain deposits held at its member institutions. Under the Bank Act, the Bank is prohibited from engaging in or carrying on any business other than the business of banking, except as permitted under that statute. The business of banking includes providing any financial services; acting as a financial agent; providing investment counselling services and portfolio management services; issuing payment, credit or charge cards; and operating payment, credit or charge card plans.

The Bank has broad powers to invest in securities, but is limited in making “substantial investments” in or in controlling certain types of entities. A “substantial investment” will arise through direct or indirect beneficial ownership of voting shares carrying more than 10 per cent of the voting rights attached to all outstanding voting shares of a corporation, shares representing more than 25 per cent of the shareholders’ equity in a corporation, or interests representing more than 25 per cent of the ownership interests in any unincorporated entity. The Bank can make controlling, and in certain circumstances, non-controlling substantial investments in certain entities in accordance with the investment provisions under the Bank Act. Some substantial investments may be made only with the prior approval of the Minister or the Superintendent of Financial Institutions (the Superintendent).

Each FRFI is also required to maintain, in relation to its operations, adequate capital and liquidity, and OSFI may direct financial institutions to increase capital and/or to provide additional liquidity.

Bail-in Regime

Canada has a bank recapitalization regime (the Bail-in Regime) for domestic systemically important banks, including the Bank. Under the Canada Deposit Insurance Corporation Act, in circumstances where the Bank has ceased, or is about to cease, to be viable, the Governor in Council may, upon recommendation of the Minister that he or she is of the opinion that it is in the public interest to do so, by order:

^2^ For the Bank’s trust subsidiaries, only their retail deposit taking activities are subject to regulation under the FCAC Act.

•	vest in CDIC the shares and subordinated debt of the Bank specified in the order (a vesting order);<br>
•	appoint CDIC as receiver in respect of the Bank (a receivership order);
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•	if a receivership order has been made, direct the Minister to incorporate a federal institution designated in the<br>order as a bridge institution wholly-owned by CDIC and specifying the date and time as of which the Bank’s deposit liabilities are assumed (a bridge bank order); or
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•	if a vesting order or receivership order has been made, direct CDIC to carry out a conversion, by converting or<br>causing the Bank to convert, in whole or in part – by means of a transaction or series of transactions and in one or more steps – the shares and liabilities of the Bank that are subject to the<br>Bail-in Regime into common shares of the Bank or any of its affiliates (a conversion order).
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Upon the making of a conversion order, prescribed shares and liabilities under the Bail-in Regime that are subject to that conversion order will, to the extent converted, be converted into common shares of the Bank or any of its affiliates, as determined by CDIC. Subject to certain exceptions, senior debt issued on or after September 23, 2018, with an initial or amended term to maturity (including explicit or embedded options) greater than 400 days, that is unsecured or partially secured and that has been assigned a CUSIP or ISIN or similar identification number is subject to a bail-in conversion. For a description of Canadian bank resolution powers and the consequent risk factors attaching to certain liabilities of the Bank reference is made to rbc.com/investor-relations/_assets-custom/pdf/Bail-in-Disclosure.pdf.

The Proceeds of Crime (MoneyLaundering) and Terrorist Financing Act (the Act) is applicable to all of our businesses in Canada. The Act implements specific measures designed to detect and deter money laundering and the financing of terrorist activities. Further, the Act sets out obligations related to deterring and detecting money laundering and terrorist financing from a global perspective, in order to minimize the possibility that RBC could become a party to these activities. RBC has enterprise-wide anti-money laundering policies and procedures which assist in reducing the risk of facilitating money laundering and terrorist financing activities.

Broker-Dealer/Investment Management Subsidiaries

The activities of certain of the Bank’s subsidiaries, such as RBC Dominion Securities Inc. (RBC DS), RBC Direct Investing Inc. (RBC DI), Royal Mutual Funds Inc. (RMFI), RBC Global Asset Management Inc., Phillips, Hager & North Investment Funds Ltd. (PH&N IF), RBC Phillips, Hager & North Investment Counsel Inc. and RBC InvestEase Inc., which act as securities dealers (including investment dealers, mutual fund dealers and exempt market dealers), advisors (investment counsel/portfolio manager) or investment fund managers are regulated in Canada under provincial and territorial securities laws (which are administered and enforced by the applicable securities regulatory authorities) and, in some cases, by the rules of the applicable self-regulatory organization (the Investment Industry Regulatory Organization of Canada for investment dealers and the Mutual Fund Dealers Association of Canada (MFDA) for mutual fund dealers). Each of RBC DS and RBC DI are members of the Canadian Investor Protection Fund. Customers’ accounts are protected by the Canadian Investor Protection Fund within specified limits. A brochure describing the nature and limits of coverage is available to customers upon request. RMFI and PH&N IF are each members of the MFDA Investor Protection Fund, which protects against certain losses of customer property held by an insolvent MFDA member; similarly, a brochure describing the nature and limits of coverage is also available to customers upon request.

Insurance

The activities of the Bank’s regulated Canadian insurance subsidiaries, RBC Life Insurance Company (RBC Life) and RBC Insurance Company of Canada (RICC), are federally governed by the Insurance Companies Act and by provincial legislation in each province and territory in which they carry on business. In addition, the Bank Act sets out a framework for insurance activities that the Bank may or may not carry out. The Bank may administer, promote and provide advice in relation to certain authorized types of insurance and may

conduct any aspect of the business of insurance, other than the underwriting of insurance, outside of Canada and in respect of risks outside Canada. However, in Canada, the Bank may not act as agent for any person in the placing of insurance. The Bank can promote an insurance company, agent or broker or non-authorized types of insurance (e.g. life and home and automobile insurance) to certain prescribed groups where the promotion takes place outside of physical bank branches. Additionally, and subject to applicable restrictions under the Bank Act, RBC Wealth Management Financial Services Inc., a wholly owned indirect subsidiary of the Bank, is licensed under applicable provincial and territorial laws to sell insurance products, including life and living benefits insurance along with money products such as annuities and segregated funds, on both an individual and group basis, for both related and independent insurance companies in Canada.

RBC Life is a member of Assuris, which is a not-for-profit organization that protects Canadian life insurance policyholders against loss of benefits due to the financial failure of a member company. RICC is a member of the Property and Casualty Insurance Compensation Corporation, which is the corporation protecting Canadian property and casualty policyholders against loss of benefits due to the financial failure of a member company.

RBC Insurance Agency Ltd., another wholly owned indirect Bank subsidiary, is a licensed insurance agency that distributes insurance products underwritten by non-RBC entities. These products include home and auto insurance that is underwritten by an unaffiliated insurance company.

Government Regulation and Supervision – United States

Banking

In the U.S., the Bank is characterized as a foreign banking organization (FBO). Generally, the operations of an FBO and its U.S. subsidiaries and offices are subject to the same comprehensive regulatory regime that governs the operations of U.S. domestic banking organizations. The Bank’s U.S. businesses are subject to supervision and oversight by various U.S. authorities, including federal and state regulators, as well as self-regulatory organizations. An FBO must meet several conditions in order to maintain “well managed” status for U.S. bank regulatory purposes: (i) the FBO must have received a composite regulatory rating of “satisfactory” or better for its U.S. branch, agency and commercial lending company operations following its last regulatory examination, (ii) the FBO’s home country supervisor must consent to it expanding its activities in the U.S. to include activities permissible for a financial holding company (FHC), (iii) the FBO’s management must meet standards comparable to those required for a U.S. bank subsidiary of an FHC, and (iv) each U.S. depository institution subsidiary of the FBO and/or bank holding company (BHC) must be deemed to be “well managed”, which is based on regulatory examination ratings.

Under the International Banking Act of 1978, as amended (IBA) and the Bank Holding Company Act of 1956, as amended (BHCA), all of the Bank’s U.S. banking operations are subject to supervision and regulation by the Board of Governors of the Federal Reserve System (Federal Reserve). Under the IBA, the BHCA, and related regulations of the Federal Reserve, the Bank generally may not open a branch, agency or representative office in the U.S., nor acquire five per cent or more of the voting stock of any U.S. bank or BHC, without notice to or prior approval of the Federal Reserve. The Federal Reserve is the U.S. “umbrella regulator” responsible for supervision and oversight of the Bank’s consolidated U.S. activities. The Federal Reserve consults with and obtains information from other prudential and functional U.S. regulators that exercise supervisory authority over the Bank’s various U.S. operations. Reports of financial condition and other information relevant to the Bank’s U.S. businesses are regularly filed with the Federal Reserve.

In 2000, the Bank became a U.S. FHC, as authorized by the Federal Reserve. Pursuant to the Gramm-Leach-Bliley Act of 1999, as amended, an FHC may engage in, or acquire companies engaged in, a broader range of financial and related activities than are permitted to banking organizations that do not maintain FHC status. To qualify as an FHC, the Bank, as an FBO and BHC, must meet certain capital requirements and must be deemed to be “well managed” for U.S. bank regulatory purposes. In addition, any U.S. depository institution subsidiaries of the FBO or BHC must also meet certain capital requirements and be deemed to be “well

managed” and must have at least a “satisfactory” rating under the Community ReinvestmentAct of 1977, as amended.

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) was enacted. The statute effected significant changes to U.S. financial regulations and required rulemaking by the U.S. financial regulators, with material cross-border implications. Section 165 of the Dodd-Frank Act required the Federal Reserve to establish Enhanced Prudential Standards for Foreign Banking Organizations (Regulation YY). Amongst other regulatory requirements, Regulation YY required the Bank to establish an intermediate holding company (IHC) organized under U.S. law. The IHC is required to hold, directly or indirectly, the Bank’s entire ownership interest in its U.S. insured depository institution subsidiaries and other U.S. subsidiaries (excluding so called section 2(h)(2) companies and debt previously contracted branch subsidiaries). In June 2018, the Bank established a two-tier BHC structure in the U.S., consisting of RBC US Group Holdings LLC (RIHC), its top-tier BHC, as the Bank’s IHC and the parent of RBC USA Holdco Corporation, the parent of most of the Bank’s U.S. subsidiaries. Both RIHC and RBC USA Holdco Corporation are BHCs and FHCs. The Bank fulfills its Regulation YY regulatory requirements through RIHC, which include capital adequacy, capital planning and stress testing, risk management and governance, liquidity and liquidity stress testing, financial regulatory reporting and other requirements that are similar to, or the same as, those applicable to U.S. domestic BHCs that are similarly categorized under the rules that tailor enhanced prudential standards for FBOs and large U.S. banking organizations. In addition, the Bank is registered as a “Swap Dealer” with the U.S. Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA) and as a “Security-Based Swap Dealer” with the U.S. Securities and Exchange Commission (SEC).

The USA PATRIOT Act of 2001, as amended, which amended the Bank Secrecy Act of 1970, as amended (the Act), requires U.S. banks and certain other financial institutions with U.S. operations to maintain appropriate policies, procedures and controls reasonably designed to comply with the Act, including, as applicable, anti-money laundering compliance programs, suspicious activity and currency transaction reporting and other obligations including due diligence on customers to prevent, detect and report individuals and entities involved in money laundering and the financing of terrorism. In January 2021, the Anti-Money Laundering Act of2020 (AMLA), which also amended the Act, was enacted. The AMLA was intended to comprehensively reform and modernize U.S. anti-money laundering laws. Many of the statutory provisions in the AMLA will require additional rulemaking, reports and other measures.

The Bank maintains two branches in New York that are licensed and supervised as full federal branches with fiduciary licenses by the Office of the Comptroller of the Currency (OCC), the U.S. supervisor of national banks. In general, the Bank’s branches may exercise the same rights and privileges, and are subject to the same restrictions, as would apply to a U.S. national bank at the same location(s). The Bank’s branches may accept wholesale deposits, but may not take U.S. domestic retail deposits outside of an available exemption. Deposits in the Bank’s branches are not insured by the Federal Deposit Insurance Corporation (FDIC). The Bank also maintains a limited federal branch in Jersey City, New Jersey which may exercise the same rights and privileges as the Bank’s New York federal branches except that it generally can only take deposits from non-U.S. sources.

The OCC examines and supervises the Bank’s U.S. branch office activities and operations. In addition, the Bank’s U.S. branches are required to maintain a capital equivalency deposit in their state(s) of residence, which deposits are pledged to the OCC. Furthermore, the Bank’s U.S. branch offices are subject to supervisory guidance based on the examiners’ assessment of risk management, operational controls, compliance and asset quality.

The Bank also maintains a state-licensed agency in Texas and state-licensed representative offices in Delaware and Texas. In general, the activities conducted at the Bank’s agency include a broad range of banking powers, including lending and maintaining credit balances, but agencies are limited in their ability to accept deposits from citizens or residents of the U.S. Further limitations may be placed on such agencies’ activities based on state laws. RBC Investor Services S.A, a Luxembourg bank, which is wholly owned by the Bank, also has a representative office in New York. The activities conducted at the representative offices

are limited to representational and administrative functions; such representative offices do not have authority to make credit decisions and may not solicit or contract for any deposit or deposit-like liability. The representative offices are examined and assessed by both the Federal Reserve and state regulators and are required to adhere to any applicable state regulations.

Banking activities are also conducted at City National Bank (CNB) and RBC Bank (Georgia), National Association (RBC Bank), both of which are national banking associations chartered by the OCC. CNB and RBC Bank are members of the Federal Reserve. The OCC serves as the primary federal prudential regulator of CNB and RBC Bank. As U.S. banks, CNB and RBC Bank are allowed to take retail deposits, and they offer retail and commercial banking services, including deposit and credit services, such as consumer lending products (including credit card and mortgage loans), and business and commercial loans. CNB and RBC Bank are subject to capital requirements, dividend restrictions, limitations on investments and subsidiaries, limitations on transactions with affiliates (including the Bank and its branches), deposit reserve requirements and other requirements administered by the OCC and the Federal Reserve. Deposits at CNB and RBC Bank are FDIC-insured to the extent applicable. CNB and RBC Bank are also required to comply with applicable consumer protection laws and regulations such as those promulgated by the Consumer Financial Protection Bureau, an independent agency created under the Dodd-Frank Act. As a national bank in the U.S., CNB also has fiduciary powers and offers trust services and investment management services under those powers.

CNB also conducts trust and investment management activities through CNB’s wholly-owned subsidiary, RBC Trust Company (Delaware) Limited (RBC Trust). RBC Trust is a Delaware trust company chartered and supervised by the Delaware State Banking Commission and, as a BHC subsidiary, is subject to oversight by the Federal Reserve. RBC Trust is subject to dividend restrictions, limitations on investments and other applicable state banking law requirements.

Broker-Dealer Activities and Broker-Dealer Subsidiaries

The principal securities brokerage, trading, advisory and investment banking activities are conducted in the following U.S.-registered broker-dealer subsidiaries:

•	RBC Capital Markets, LLC (RBC CM LLC),
•	RBC CMA LLC,
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•	City National Securities, Inc.,
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•	CNR Securities, LLC (formerly RIM Securities LLC), and
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•	Symphonic Securities LLC.
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The SEC, state securities regulators, the Financial Industry Regulatory Authority and other self-regulatory organizations regulate these broker-dealer subsidiaries. Certain activities of RBC CM LLC and RBC CMA LLC are also subject to regulation by the CFTC and the NFA. Pursuant to the Dodd-Frank Act, RBC CM LLC is registered as a “Swaps Firm” with the NFA. Certain activities of RBC CM LLC are subject to regulation by the Municipal Securities Rulemaking Board.

Investment Management and Other Fiduciary Activities

The Bank’s New York branches have fiduciary powers, and certain branches conduct investment management and custody activities for certain customers. In addition, other affiliates are involved in the business of investment management. In many cases, these activities require that the affiliates be registered with the SEC as investment advisers under the U.S. Investment Advisers Act of 1940, as amended (Advisers Act). The Advisers Act and related rules regulate the registration and activities of investment advisers. Although the regulatory regime for investment advisers is similar in some ways to that for broker-dealers, the standard of conduct is higher due to the advisers’ status as fiduciaries.

The following entities are the Bank’s subsidiaries that are registered as “investment advisers” with the SEC:

•	RBC CM LLC,
•	RBC Global Asset Management (U.S.) Inc. (GAM),
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•	RBC Global Asset Management (UK) Limited,
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•	RBC Private Counsel (USA) Inc.,
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•	BlueBay Asset Management LLP (BBAM),
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•	City National Rochdale, LLC (CNR),
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•	City National Securities, Inc.,
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•	LMCG Investments, LLC,
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•	Mid-Continent Capital, LLC, and
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•	Symphonic Financial Advisors LLC.
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GAM and CNR also each sponsor and act as the adviser to U.S. mutual funds. The U.S. Investment Company Act of 1940, as amended, and related rules regulate the registration and operation of mutual funds and certain activities of the funds’ advisers and other affiliates and certain of the funds’ other service providers. Certain activities of BBAM and GAM are also subject to regulation by the CFTC and the NFA.

ERISA and the Internal Revenue Code

The U.S. Employee Retirement Income Security Act of 1974, as amended (ERISA), and the related rules regulate the activities of the financial services industry with respect to pension plan clients. Similarly, the U.S. Internal Revenue Code and the regulations thereunder impose requirements with respect to such clients and also individual retirement accounts (IRAs). Brokers, dealers and investment advisers to pension plans and IRAs must conduct their business in compliance with both ERISA and applicable tax regulations.

Risk Factors

A discussion of risks affecting us and our businesses appears under the headings “Impact of COVID-19 pandemic”, “Risk management”, “Transactional/positional risk drivers”, “Operational/regulatory compliance risk drivers”, “Strategic risk drivers”, “Macroeconomic risk drivers” and “Overview of other risks” from pages 17 to 20 and 52 to 99 of our 2021 Management’s Discussion and Analysis, which discussions are incorporated by reference herein.

Environmental and Social Risk Policies

RBC has a long history of environmental leadership dating back to 1991 when we launched our first corporate environmental policy. RBC is committed to transparent disclosure and we report annually on our key environmental performance metrics and targets in our Environmental, Social and Governance (ESG) Performance Report and CDP (Carbon Disclosure Project) questionnaire submissions (responder since 2003 and a signatory since 2007). We have been a signatory to the Equator Principles since 2003, and RBC Global Asset Management^3^ and BlueBay Asset Management LLP have been signatories to the United Nations Principles for Responsible Investment since 2015. In 2021, RBC joined the Partnership for Carbon Accounting Financials (PCAF) and RMI’s Center for Climate-Aligned Finance and participated in a climate scenario analysis pilot project with the Bank of Canada and OSFI to build our climate scenario analysis knowledge and understanding of our potential exposure to climate-related transition risks. In October 2021, we pledged to join the Net-Zero Banking Alliance (NZBA) as part of a global, industry-led initiative to accelerate and support efforts to address climate change. RBC Europe Limited, a wholly-owned subsidiary

^3^ RBC GAM includes the following affiliates: BlueBay Asset Management LLP (BlueBay), RBC Global Asset Management Inc. (including Phillips, Hager & North Investment Management), RBC Global Asset Management (U.S.) Inc., RBC Global Asset Management (UK) Limited, and RBC Global Asset Management (Asia) Limited, which are separate, but affiliated subsidiaries of RBC.

of the Bank, is a signatory to the Green Bond Principles and it reports annually on its green bond underwriting activities. In 2021, we updated the RBC Climate Blueprint, our enterprise climate strategy focused on accelerating clean economic growth and supporting our clients in the transition to net-zero, to better align with the global goals of the Paris Agreement. RBC is committed to publishing climate-related disclosures, at least annually, that consider the recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures, and has provided these since 2017. RBC also has a Human Rights Position Statement and publishes an annual Modern Slavery Act Statement, which sets out the steps that we have taken to ensure that slavery and human trafficking are not taking place in our supply chains or our business.

RBC has a suite of environmental and social risk management policies, which include policies that are enterprise-wide, policies that are business-specific, and/or policies that apply to certain issues, products, services or industry sectors. These policies focus on environmental and social risk issues including, but not limited to: site contamination, waste management, land and resource use, biodiversity, water quality and availability, climate change, environmental regulation, human rights (including, but not limited to, Indigenous Peoples’ rights) and community engagement. Our environmental and social risk policies seek to identify sectors, clients and business activities that may expose us to environmental and social risk; establish requirements to manage, mitigate and monitor environmental and social risk, including when to apply enhanced due diligence and escalation procedures. Our Enterprise Policy on Environmental and Social Risk includes financing restrictions on coal power, coal mining and Arctic development, including a full prohibition on direct financing for any project or transaction that involves exploration or development in the Arctic National Wildlife Refuge. Business segments and functional areas are responsible for incorporating environmental and social risk management requirements within their operations.

Additional information about our environmental and social risk policies can be found under “Overview of other risks – Environmental and social risk” on page 97 of our 2021 Management’s Discussion and Analysis, which section is incorporated by reference herein.

DESCRIPTION OF CAPITAL STRUCTURE

General Description

The Bank’s authorized share capital consists of an unlimited number of common shares without nominal or par value and an unlimited number of first preferred shares and second preferred shares without nominal or par value, issuable in series, which classes may be issued for a maximum consideration of $20 billion and $5 billion, respectively. The following summary of share capital is qualified in its entirety by the Bank’s by-laws and the actual terms and conditions of such shares.

Common Shares

The holders of the Bank’s common shares are entitled to vote at all meetings of shareholders, except meetings at which only holders of a specified class, other than common shares, or series of shares are entitled to vote. The holders of common shares are entitled to receive dividends as and when declared by the board of directors, subject to the preference of the preferred shares. After payment to the holders of the preferred shares of the amount or amounts to which they may be entitled, and after payment of all outstanding debts, the holders of the common shares will be entitled to receive any remaining property upon liquidation, dissolution or winding-up.

Preferred Shares

First preferred shares may be issued, from time to time, in one or more series with such rights, privileges, restrictions and conditions as the board of directors may determine, subject to the Bank Act and to the Bank’s by-laws. The first preferred shares are entitled to preference over any second preferred shares (discussed

below) and common shares and over any other shares ranking junior to the first preferred shares with respect to the payment of dividends and in the distribution of property in the event of liquidation, dissolution or winding-up.

As at November 30, 2021, Non-Cumulative First Preferred Shares Series AZ, BB, BD, BF, BH, BI, BJ, BO, BQ, BR, BS, BT and C-2 are outstanding. The Non-Cumulative First Preferred Shares Series AZ, BB, BD, BF, BH, BI, BJ and BO are listed on the Toronto Stock Exchange, while the Bank’s Depositary Shares representing interests in the Non-Cumulative First Preferred Shares Series C-2 (the Series C-2 Preferred Shares) are listed on the New York Stock Exchange. The Non-Cumulative First Preferred Shares Series BQ, BR, BS and BT are not listed on an exchange. On May 24, 2021, we redeemed all of our issued and outstanding Non-Cumulative First Preferred Shares Series BK. On August 24, 2021, we redeemed all of our issued and outstanding Non-Cumulative First Preferred Shares Series BM.

Effective January 1, 2013, in accordance with capital adequacy requirements adopted by OSFI, non-common capital instruments issued after January 1, 2013, including first preferred shares, must include terms providing for the full and permanent conversion of such securities into common shares upon the occurrence of certain trigger events relating to financial viability (the Non-Viability Contingent Capital requirements) in order to qualify as regulatory capital. As of January 1, 2013, all outstanding capital instruments that do not meet the Non-Viability Contingent Capital requirements are considered non-qualifying capital instruments and are to be phased out beginning January 1, 2013 at the rate of 10 per cent each year for 10 years. The Non-Cumulative First Preferred Shares Series AZ, BB, BD, BF, BH, BI, BJ, BO, BQ, BR, BS and BT contain non-viability contingent capital provisions necessary to qualify as Tier 1 regulatory capital under Basel III and are therefore convertible into common shares upon the occurrence of a non-viability contingent capital trigger event.

We are prohibited by the Bank Act from declaring or paying any dividends on our preferred or common shares when we are, or would be placed as a result of the declaration, in contravention of the capital adequacy and liquidity regulations or any regulatory directives issued under the Bank Act. We may not pay dividends on our common shares or redeem, purchase or otherwise retire common shares or preferred shares at any time without the approval of the holders of outstanding first preferred shares unless all dividends to which first preferred shareholders are then entitled have been declared and paid or set apart for payment.

The Non-Cumulative First Preferred Shares Series BT were issued on November 5, 2021 to certain institutional investors.

The Non-Cumulative First Preferred Shares Series BQ, BR and BS (the LRCN Preferred Shares) were respectively issued on July 28, 2020, November 2, 2020 and June 8, 2021 in connection with the Bank’s concurrent issuances of Limited Recourse Capital Notes (the LRCNs). The LRCN Preferred Shares are held by Computershare Trust Company of Canada as trustee (the Trustee) for Leo LRCN Limited Recourse Trust^™^ (the Limited Recourse Trust). In certain circumstances, including non-payment of interest on, principal of or redemption price for the LRCNs when due, or the occurrence of an event of default or a non-viability contingent capital trigger event, the Trustee of the Limited Recourse Trust will deliver to holders of LRCNs their proportionate share of the Limited Recourse Trust’s assets, which will consist of the LRCN Preferred Shares except in limited circumstances, in full satisfaction of the Bank’s obligations under the LRCNs.

For so long as the LRCN Preferred Shares are held by the Trustee on behalf of the Limited Recourse Trust, such shares will not be entitled to receive dividends.

On November 2, 2015, in connection with the merger of CNB with and into RBC USA Holdco Corporation, the Bank issued Non-Cumulative First Preferred Shares Series C-1 and C-2 in exchange for two series of outstanding CNB preferred stock. Currently, only the Series C-2 Preferred Shares remain outstanding.

In the event the Bank fails to pay, declare, or set aside for payment, dividends on any of the Series C-2 Preferred Shares or any other series of preferred shares of the Bank for six quarterly dividend periods, or their equivalent, whether or not consecutive, the number of directors of the board of directors shall be increased by two at the Bank’s first annual meeting of shareholders held thereafter. The holders of the Series C-2 Preferred Shares shall have the right, together with holders of any shares that, by their terms, expressly provide that they rank pari passu with the Series C-2 Preferred Shares (together, the Series C-2 Parity Shares) and that have similar voting rights, if any, to elect, as a class together, such additional two members to the Bank’s board of directors for a term of one year. Upon the payment, or the declaration and setting aside for payment, in full, of all the cumulative dividends payable for all past dividend periods and continuous noncumulative dividends for at least one year on all outstanding preferred shares of the Bank, the terms of such two directors shall terminate, the number of directors of the Bank’s board of directors shall be reduced by two and the voting rights of the holders of the Series C-2 Preferred Shares and the Series C-2 Parity Shares shall cease (subject to the revesting of such voting rights in the event of each and every additional failure in the payment of dividends for six quarterly dividend periods).

Second preferred shares may be issued, from time to time, in one or more series with such rights, privileges, restrictions and conditions as the board of directors may determine, subject to the Bank Act and to the Bank’s by-laws. **** There are no second preferred shares currently outstanding. Second preferred shares would rank junior to the first preferred shares. Second preferred shares would be entitled to preference over the common shares and over any other shares ranking junior to the second preferred shares with respect to the payment of dividends and in the distribution of property in the event of our liquidation, dissolution or winding-up.

Except as outlined above with respect to the Series C-2 Preferred Shares and the Series C-2 Parity Shares, holders of the first and second preferred shares are not entitled to any voting rights as a class except as provided under the Bank Act or the Bank’s by-laws. Under the Bank Act, the Bank may not create any other class of shares ranking equal with or superior to a particular class of preferred shares, increase the authorized number of, or amend the rights, privileges, restrictions or conditions attaching to such class of preferred shares, without the approval of the holders of that class of preferred shares. ****

Any approval to be given by the holders of the first and second preferred shares may be given in writing by the holders of not less than all of the outstanding preferred shares of each class or by a resolution carried by the affirmative vote of not less than 66^2^⁄3 per cent of the votes cast at a meeting of holders of each class of preferred shares at which a quorum is represented. A quorum at any meeting of holders of each class of preferred shares is 51 per cent of the shares entitled to vote at such meeting, except that at an adjourned meeting there is no quorum requirement.

Additional information about the Bank’s share capital can be found under “Capital management” beginning on page 100 of our 2021 Management’s Discussion and Analysis and in Note 32 “Subsequent Events” on page 225 of our 2021 Annual Consolidated Financial Statements, which section and note are incorporated by reference herein.

Prior Sales

For information about the Bank’s issuances of subordinated debentures since October 31, 2020, see the “Capital management” section beginning on page 100 of our 2021 Management’s Discussion and Analysis and Note 18 “Subordinated debentures” on page 205 of our 2021 Annual Consolidated Financial Statements, which section and note are incorporated by reference herein. For information about the Bank’s issuances of Limited Recourse Capital Notes since October 31, 2020, see the “Capital management” section beginning on page 100 of our 2021 Management’s Discussion and Analysis and Note 19 “Equity” beginning on page 205 of our 2021 Annual Consolidated Financial Statements, which section and note are incorporated by reference herein.

Constraints

The Bank Act contains restrictions on the issue, transfer, acquisition, beneficial ownership and voting of shares of a chartered bank. The following is a summary of several key restrictions.

Subject to certain exceptions contained in the Bank Act, no person may be a major shareholder of a bank having equity of $12 billion or more (which includes the Bank). A person is a major shareholder if:

(a)	the aggregate of the shares of any class of voting shares of the Bank beneficially owned by that person, by<br>entities controlled by that person and by any person associated or acting jointly or in concert with that person is more than 20 per cent of that class of voting shares, or
(b)	the aggregate of shares of any class of non-voting shares of the Bank<br>beneficially owned by that person, by entities controlled by that person and by any person associated or acting jointly or in concert with that person is more than 30 per cent of that class of non-voting<br>shares.
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Additionally, no person may have a significant interest in any class of shares of a bank (including the Bank) unless the person first receives the approval of the Minister. For purposes of the Bank Act, a person has a significant interest in a class of shares of a bank where the aggregate of any shares of the class beneficially owned by that person, by entities controlled by that person and by any person associated or acting jointly or in concert with that person exceeds 10 per cent of all of the outstanding shares of that class of shares of such bank.

The Bank Act also prohibits a bank from purchasing or redeeming any of its shares or paying any dividends if there are reasonable grounds for believing the bank is, or the payment would cause the bank to be, in contravention of the Bank Act requirement to maintain, in relation to its operations, adequate capital and appropriate forms of liquidity and to comply with any regulations or directions of the Superintendent in relation thereto. Under the Bank Act, the Bank cannot redeem or purchase any shares for cancellation unless the prior consent of the Superintendent has been obtained.

Subject to certain exceptions, the Bank Act also prohibits the registration of a transfer or issue of any shares of a Canadian bank to any government or government agency of Canada or any province of Canada, or to any government of any foreign country, or any political subdivision, or agency of any foreign country.

Ratings

Our ability to access unsecured funding markets and to engage in certain collateralized business activities on a cost-effective basis is primarily dependent upon maintaining competitive credit ratings. Credit ratings and outlooks provided by rating agencies reflect their views and methodologies. Our credit ratings are largely determined by the rating agencies’ assessment of the quality of our earnings, the adequacy of our capital and the effectiveness of our risk management programs. Ratings are subject to change, based on a number of factors including, but not limited to, our financial strength, competitive position, liquidity and other factors not completely within our control. There can be no assurance that our credit ratings and rating outlooks will not be lowered or that ratings agencies will not issue adverse commentaries about us, potentially resulting in adverse consequences for our funding capacity or access to capital markets.

A lowering of our credit ratings may also affect our ability, and the cost, to enter into normal course derivative or hedging transactions and may require us to post additional collateral under certain contracts. However, we estimate, based on periodic reviews of ratings triggers embedded in our existing businesses and of our funding capacity sensitivity, that a minor downgrade would not materially influence our liability composition, funding access, collateral usage and associated costs.

As at November 30, 2021, RBC had the following solicited ratings from the rating agencies listed below: ****

		RATING	RANK*
Moody’s Investors Service	Legacy Senior Long-term Debt^1^	Aa2	3 of 21
	Senior Long-term Debt^2^	A2	6 of 21
	Short-term Debt	P-1	1 of 4
	Subordinated Debt	Baa1	8 of 21
	NVCC Subordinated Debt	Baa1 (hyb)	8 of 21
	Preferred Shares	Baa3	10 of 21
	NVCC Preferred Shares	Baa3 (hyb)	10 of 21
	Outlook – Under review^3^
Standard & Poor’s	Legacy Senior Long-term Debt^1^	AA-	4 of 21
	Senior Long-term Debt^2^	A	6 of 21
	Short-term Debt	A-1+	1 of 7
	Subordinated Debt	A	6 of 21
	NVCC Subordinated Debt	A-	7 of 21
	Preferred Shares	BBB+	8 of 21
	NVCC Preferred Shares	BBB	9 of 21
	Outlook – Stable
Fitch Ratings	Legacy Senior Long-term Debt^1^	AA	3 of 23
	Senior Long-term Debt^2^	AA-	4 of 23
	Short-term Debt	F1+	1 of 8
	Subordinated Debt	A	6 of 23
	NVCC Subordinated Debt	A	6 of 23
	Preferred Shares	-	-
	NVCC Preferred Shares	-	-
	Outlook – Stable
DBRS	Legacy Senior Long-term Debt^1^	AA (high)	2 of 26
	Senior Long-term Debt^2^	AA	3 of 26
	Short-term Debt	R-1 (high)	1 of 10
	Subordinated Debt	AA (low)	4 of 26
	NVCC Subordinated Debt	A	6 of 26
	Preferred Shares	Pfd-1 (low)	3 of 16
	NVCC Preferred Shares	Pfd-2 (high)	4 of 16
	Outlook – Stable
^*^	Relative rank of each rating within the organization’s overall classification system.<br>
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^1^	Includes senior long-term debt issued prior to September 23, 2018 and senior long-term debt issued on or<br>after September 23, 2018, which is excluded from the Bail-in Regime.
---	---
^2^	Includes senior long-term debt issued on or after September 23, 2018 which is subject to conversion under<br>the Bail-in Regime.
---	---
^3^	On October 7, 2021, Moody’s placed our long-term senior debt, subordinated debt and preferred share<br>ratings and assessments on review for upgrade. Our short-term debt ratings were affirmed.
---	---

A definition of the categories of each rating as at November 30, 2021 has been obtained from the respective rating agency’s website and is outlined in Appendix B, and a more detailed explanation may be obtained from the applicable rating agency.

On July 15, 2021, Fitch Ratings downgraded our rating for legacy senior long-term debt to AA from AA+, downgraded our rating for senior long-term debt to AA- from AA, downgraded our rating for subordinated debt to A from A+ and revised our outlook to stable from negative.

On May 14, 2021, DBRS affirmed our ratings with a stable outlook.

Standard & Poor’s affirmed our ratings with a stable outlook as of July 19, 2021 in a report published on October 7, 2021.

On October 7, 2021, Moody’s placed our long-term senior debt, subordinated debt and preferred share ratings and assessments on review for upgrade. Our short-term debt ratings were affirmed.

Credit ratings, including stability or provisional ratings (collectively, Ratings) are not recommendations to purchase, sell or hold a financial obligation inasmuch as they do not comment on market price or suitability for a particular investor. Ratings may not reflect the potential impact of all risks on the value of securities. In addition, real or anticipated changes in the rating assigned to a security will generally affect the market value of that security. Ratings are determined by the rating agencies based on criteria established from time

to time by them and are subject to revision or withdrawal at any time by the rating organization. Each Rating listed in the table above should be evaluated independently of any other Rating applicable to our debt and preferred shares. As is customary, RBC pays rating agencies to assign Ratings for the parent company as well as our subsidiaries, and for certain other services.

Additional information about Ratings is provided under “Transactional/positional risk drivers – Liquidity and funding risk – Credit ratings” on page 84 of our 2021 Management’s Discussion and Analysis, which section is incorporated by reference herein.

MARKET FOR SECURITIES

Trading Price and Volume

The Bank’s common shares are listed on the Toronto Stock Exchange (TSX) in Canada, the New York Stock Exchange (NYSE) in the U.S. and the SIX Swiss Exchange (SIX) in Switzerland. The Bank’s Non-Cumulative First Preferred Shares Series AZ, BB, BD, BF, BH, BI, BJ and BO are listed on the TSX. The Bank’s Depositary Shares (representing interests in the Series C-2 Preferred Shares) are listed on the NYSE.

The following table sets out the price range and trading volumes of the common shares on the TSX and the US Composite for the periods indicated. Prices are based on the reported amounts from the TSX Historical Data Access (TSX HDA) and NYSE Connect.

	Common Shares (TSX)				Common Shares (NYSE)
Month	High ()	Low ()	Volume		High (US)	Low (US)	Volume
December 2020				64,580,865				11,733,255
January 2021				116,360,965				22,961,285
February 2021				90,287,241				25,358,858
March 2021				90,995,952				33,121,722
April 2021				113,430,434				23,314,105
May<br>2021				65,532,014				23,735,797
June 2021				57,679,562				21,716,821
July 2021				99,664,100				22,247,710
August 2021				56,201,579				21,594,693
September 2021				46,454,018				20,557,880
October 2021				99,654,956				22,300,434
November 1-29, 2021				65,145,240				26,285,292

All values are in US Dollars.

The following tables provide the price range and trading volumes of the first preferred shares on the TSX for the periods indicated.^4^ Prices are based on the reported amounts from the TSX HDA.

^4^ On May 24, 2021, we redeemed all of our issued and outstanding Non-Cumulative First Preferred Shares Series BK. On August 24, 2021, we redeemed all of our issued and outstanding Non-Cumulative First Preferred Shares Series BM.

	Series AZ				Series BB				Series BD
Month	High ()	Low ()	Volume		High ()	Low ()	Volume		High ()	Low ()	Volume
December 2020				461,274				652,684				630,365
January 2021				390,699				401,750				364,982
February 2021				361,661				405,434				748,960
March 2021				988,994				348,927				749,920
April 2021				501,897				559,449				398,084
May<br>2021				439,232				273,659				260,333
June 2021				533,615				225,551				164,577
July 2021				197,068				399,023				144,585
August 2021				200,479				494,994				442,170
September 2021				297,190				195,474				437,186
October 2021				329,898				600,686				303,457
November 1-29, 2021				291,126				465,602				406,012

All values are in US Dollars.

	Series BF				Series BH				Series BI
Month	High ()	Low ()	Volume		High ()	Low ()	Volume		High ()	Low ()	Volume
December 2020				541,326				159,410				48,879
January 2021				691,151				209,768				70,170
February 2021				49,865				49,253				58,886
March 2021				209,277				27,666				47,449
April 2021				90,164				45,185				87,191
May<br>2021				189,708				42,556				59,155
June 2021				125,235				23,778				55,077
July 2021				122,435				37,672				48,195
August 2021				183,219				24,290				33,401
September 2021				73,054				55,146				90,167
October 2021				64,165				23,316				37,542
November 1-29, 2021				61,687				54,290				68,076

All values are in US Dollars.

	Series BJ				Series BK				Series BM
Month	High ()	Low ()	Volume		High ()	Low ()	Volume		High ()	Low ()	Volume
December 2020				72,114				617,755				339,789
January 2021				279,476				344,632				130,951
February 2021				62,310				329,215				296,915
March 2021				64,334				775,886				360,353
April 2021				484,542				628,700				808,756
May<br>2021				103,832				291,814				238,140
June 2021				79,530				-				388,247
July 2021				22,082				-				872,884
August 2021				56,689				-				204,744
September 2021				104,170				-				-
October 2021				119,226				-				-
November 1-29, 2021				18,739				-				-

All values are in US Dollars.

	Series BO
Month	High ()	Low ()	Volume
December 2020				441,398
January 2021				258,479
February 2021				233,211
March 2021				415,640
April 2021				409,340
May 2021				399,778
June 2021				299,381
July 2021				188,403
August 2021				181,433
September 2021				161,654
October 2021				162,860
November 1-29, 2021				165,455

All values are in US Dollars.

The following table provides the price range and trading volumes of the Depositary Shares on the NYSE for the period indicated. Prices are based on the reported amounts from NYSE Connect.

	Series C-2
Month	High (US)	Low (US)	Volume
December 2020				10,672
January 2021				11,347
February 2021				9,990
March 2021				16,140
April 2021				7,722
May 2021				7,307
June 2021				6,858
July 2021				14,672
August 2021				39,464
September 2021				17,711
October 2021				8,333
November 1-29, 2021				2,986

All values are in US Dollars.

DIVIDENDS

The Bank has had an uninterrupted history of paying dividends on its common shares and on each of its outstanding series of first preferred shares. Information about the Bank’s dividends paid or payable per share on the common shares and each outstanding series of first preferred shares in each of the two most recently completed years appears under the heading “Selected capital management activity” in the “Capital management” section beginning on page 106 of our 2021 Management’s Discussion and Analysis, which section is incorporated by reference herein. Information about restrictions on the payment of dividends appears under the heading “Restrictions on the payment of dividends” in Note 19 “Equity” on page 208 of our 2021 Annual Consolidated Financial Statements, which note is incorporated by reference herein.

On March 13, 2020, in response to the disruption related to the COVID-19 pandemic, OSFI announced its expectation that all banks should not increase their dividend payments. OSFI lifted this restriction on November 4, 2021.

The declaration amount and payment of future dividends will be subject to the discretion of the Bank’s board of directors, and will be dependent upon the Bank’s results of operations, financial condition, cash requirements and future regulatory restrictions on the payment of dividends and other factors deemed relevant by the board of directors.

Information about our dividends and our dividend payout ratio (common share dividends as a percentage of net income less preferred share dividends) is provided under the heading “Selected capital management activity” in the “Capital management” section beginning on page 106 of our 2021 Management’s Discussion and Analysis and in Note 19 “Equity” beginning on page 205 of our 2021 Annual Consolidated Financial Statements, which section and note are incorporated by reference herein.

SECURITIES SUBJECT TO CONTRACTUAL RESTRICTION ON TRANSFER

In connection with each issuance of LRCNs, the Bank also concurrently issues first preferred shares. These LRCN Preferred Shares are held in the Limited Recourse Trust. Pursuant to the Amended and Restated Declaration of Trust for the Limited Recourse Trust and the share provisions for the LRCN Preferred Shares, the Trustee of the Limited Recourse Trust will only deliver the LRCN Preferred Shares to holders of LRCNs under certain prescribed circumstances further described herein under “Description of Capital Structure – Preferred Shares”.

Securities Subject to Contractual Restriction on Transfer as at November 30, 2021

Designation of<br><br><br>Class	Number of Securities thatare Subject to a<br> <br>Contractual Restriction on Transfer	Percentage of Class
First Preferred Shares	1,750,000 Non-Cumulative<br>First Preferred Shares Series BQ<br> <br><br> <br>1,250,000<br>Non-Cumulative First Preferred Shares Series BR<br> <br><br><br><br>1,000,000 Non-Cumulative First Preferred Shares Series BS	3.55%

DIRECTORS AND EXECUTIVE OFFICERS

Directors

The following are the Bank’s directors as at November 30, 2021:

Name and Year Elected	Province/State and<br><br><br>Country of Residence	Occupation
Andrew A. Chisholm (2016)	Ontario, CAN	Corporate Director
Jacynthe Côté (2014)	Quebec, CAN	Corporate Director
Toos N. Daruvala (2015)	New York, U.S.A.	Corporate Director
David F. Denison (2012)	Ontario, CAN	Chair of the Board, Element Fleet Management Corp.
Cynthia Devine (2020)	Ontario, CAN	Chief Financial Officer, Maple Leaf Sports and Entertainment
Roberta L. Jamieson (2021)	Ontario, CAN	Corporate Director

Name and Year Elected	Province/State and<br><br><br>Country of Residence	Occupation
David I. McKay (2014)	Ontario, CAN	President and Chief Executive Officer, Royal Bank of Canada
Kathleen P. Taylor (2001)	Ontario, CAN	Chair of the Board, Royal Bank of Canada
Maryann Turcke (2020)	Ontario, CAN	Senior Advisor, Brookfield Infrastructure Partners L.P.
Thierry Vandal (2015)	New York, U.S.A.	President, Axium Infrastructure US Inc.
Bridget A. van Kralingen (2011)	New Jersey, U.S.A.	Senior Vice-President, Special Projects, IBM Corporation
Frank Vettese (2019)	Ontario, CAN	Corporate Director
Jeffery W. Yabuki (2017)	Nevada, U.S.A.	Chairman, Sportradar AG

Directors are elected annually and hold office until the next annual meeting of shareholders. Since November 1, 2016, the directors have held the principal occupations described above, except for the following:

Mr. Toos N. Daruvalawas Co-Chief Executive Officer, MIO Partners, Inc. from November 2016 through March 2021.

Ms. Cynthia Devine was Executive Vice President, Chief Financial Officer and Corporate Secretary, RioCan Real Estate Investment Trust from March 2015 through March 2017.

Ms. Roberta L. Jamieson was President and Chief Executive Officer of Indspire (a Canadian Indigenous charity that invests in the education of First Nations, Inuit and Métis people) from November 2004 through December 2020.

Ms. Maryann Turcke was Chief Operating Officer, National Football League from January 2018 through September 2020, President, NFL Network, Digital Media, IT and Films, National Football League from April 2017 through January 2018 and President, Bell Media from April 2015 through February 2017.

Ms. Bridget van Kralingen served in a variety of leadership positions since joining IBM Corporation in 2004 until her retirement as Senior Vice-President of Global Markets in July 2021, including Senior Vice-President of Global Industries, Platform and Blockchain, Senior Vice-President of IBM Global Business Services and General Manager of IBM North America.

Mr. Frank Vettese was Managing Partner and Chief Executive, Deloitte Canada from 2012 through June 2019.

Mr. Jeffery W. Yabuki was Executive Chairman, Fiserv, Inc. from June through December 2020 and Chief Executive Officer, Fiserv, Inc. from 2005 through June 2020.

Committees of the Board

Audit Committee: F. Vettese (Chair), C. Devine, M. Turcke, B.A. van Kralingen and J.W. Yabuki.

Risk Committee: T.N. Daruvala (Chair), A.A. Chisholm, J. Côté, D.F. Denison, R.L. Jamieson and T. Vandal.

Governance Committee: J. Côté (Chair), A.A. Chisholm, D. Denison, C. Devine, R.L. Jamieson and J.W. Yabuki.

Human Resources Committee: T. Vandal (Chair), T.N. Daruvala, M. Turcke, B.A. van Kralingen and F. Vettese.

Executive Officers

The following are the Bank’s executive officers as at November 30, 2021:

Name	Province/State and Country of Residence	Title
Nadine Ahn	Ontario, CAN	Chief Financial Officer
Maria Douvas	New York, U.S.A.	Chief Legal Officer
Helena Gottschling	Ontario, CAN	Chief Human Resources Officer
Douglas Guzman	Ontario, CAN	Group Head, RBC Wealth Management, RBC Insurance and RBC Investor & Treasury Services
Graeme Hepworth	Ontario, CAN	Chief Risk Officer
Christoph Knoess	New York, U.S.A.	Chief Administrative & Strategy Officer
David I. McKay	Ontario, CAN	President & Chief Executive Officer
Neil McLaughlin	Ontario, CAN	Group Head, Personal & Commercial Banking
Derek Neldner	Ontario, CAN	CEO and Group Head, RBC Capital Markets
Bruce Ross	Ontario, CAN	Group Head, Technology and Operations

Since November 1, 2016, the executive officers have held the positions described below:

Ms. Nadine Ahn was appointed to Group Executive in her role as Chief Financial Officer effective November 1, 2021. Prior to her current role, Ms. Ahn was Senior Vice President, Wholesale Finance & Investor Relations since March 2019, Senior Vice President, CFO Wholesale Finance since June 2016 and VP & Controller, Global Head of Financial Control, Capital Markets Finance since 2014.

Ms. Maria Douvas was appointed to the Group Executive in her role as Chief Legal Officer effective September 17, 2021. Prior to her current role, Ms. Douvas was Executive Vice President and General Counsel since February 2021, Senior Vice President, U.S. General Counsel and Global Head of Litigation since September 2018 and Vice President and Global Head of Litigation and Employment Law since April 2016.

Ms. Helena Gottschling was appointed to Group Executive in her role as Chief Human Resources Officer effective June 1, 2017. Prior to her current role, Ms. Gottschling was Senior Vice President, Human Resources since January 2008.

Mr. Douglas Guzman was appointed to Group Executive in his role as Group Head, Wealth Management & Insurance effective November 1, 2015 and assumed leadership of Investor & Treasury Services effective November 1, 2019. Prior to his current role, Mr. Guzman was Managing Director and Head Global Investment Banking, Capital Markets since 2006.

Mr. Graeme Hepworth was appointed to Group Executive in his role as Chief Risk Officer of Royal Bank of Canada effective April 9, 2018. Prior to his current role, Mr. Hepworth was Executive Vice President, Group Risk Management, Retail and Commercial Risk since 2017, Senior Vice President, Group Risk Management, Personal & Commercial Banking since 2015.

Mr. Christoph Knoess was appointed to the Group Executive in his role as Chief Administrative Officer effective December 2, 2019. Prior to joining RBC, Mr. Knoess was a Partner in Digital, Technology and Organizational Agility in Banking at McKinsey & Company since 2017 and prior to that he was a Partner and Global Head of the Digital, Technology and Analytics Practice at Oliver Wyman since 2008.

Mr. David I. McKay was appointed President of Royal Bank of Canada effective in February 2014 and Chief Executive Officer effective in August 2014. Mr. McKay was appointed to Group Executive in his role as Group Head, Canadian Banking in April 2008 and was appointed Group Head, Personal & Commercial Banking effective October 31, 2012.

Mr. Neil McLaughlin was appointed to Group Executive in his role as Group Head, Personal & Commercial Banking effective May 2017. In September 2021, Mr. McLaughlin also assumed responsibility for RBC Ventures. Prior to his current role, Mr. McLaughlin was Executive Vice President, Business Financial Services, Personal & Commercial Banking since October 2014.

Mr. Derek Neldner was appointed to the Group Executive in his role as Group Head and CEO, Capital Markets effective November 1, 2019. Prior to his current role, Mr. Neldner was Global Head of Investment Banking since June 2018, and Head, Canadian and Asia Pacific Banking since June 2014.

Mr. Bruce Ross was appointed to Group Executive in his role as Group Head, Technology and Operations effective in January 2014. Prior to joining RBC, Mr. Ross was with IBM, holding a series of progressively more senior positions.

Ownership ofSecurities

To our knowledge, as at October 31, 2021, the directors and executive officers, as a group, beneficially own or exercise control or direction over less than one per cent (1%) of our common and preferred shares. None of our directors or executive officers holds shares of our subsidiaries except where required for qualification as a director of a subsidiary.

Cease Trade Orders, Bankruptcies, Penalties or Sanctions

To the best of our knowledge, no director or executive officer,

(a)	is, as at November 30, 2021 or has been, within the 10 years before, a director, chief executive officer<br>or chief financial officer of any company (including our company), that while that person was acting in that capacity,
(i)	was the subject of a cease trade or similar order or an order that denied the relevant company access to any<br>exemption under Canadian securities legislation,^5^ for a period of more than 30 consecutive days, or
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^5^ National Instrument 14-101 restricts the meaning of “securities legislation” to Canadian provincial and territorial legislation and “securities regulatory authority” to Canadian provincial and territorial securities regulatory authorities.

(ii)	was subject to an event that resulted, after the director or executive officer ceased to be a director, chief<br>executive officer or chief financial officer, in the company being the subject of a cease trade or similar order or an order that denied the relevant company access to any exemption under Canadian securities legislation,^6^ for a period of more than 30 consecutive days, or
(b)	is, as at November 30, 2021 or has been, within the 10 years before, a director or executive officer of<br>any company (including our company), that while that person was acting in that capacity or within a year of that person ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or<br>was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold its assets, or
---	---
(c)	has, within the 10 years before November 30, 2021, become bankrupt, made a proposal under any legislation<br>relating to bankruptcy or insolvency, or become subject to or instituted any proceedings, arrangement or compromise with creditors, or had a receiver, receiver manager or trustee appointed to hold the assets of the director or executive officer.<br>
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To the best of our knowledge, none of our directors or executive officers have been subject to (a) any penalties or sanctions imposed by a court relating to Canadian securities legislation^6^ or by a Canadian securities regulatory authority^6^ or has entered into a settlement agreement with a Canadian securities regulatory authority,^6^ or (b) any other penalties or sanctions imposed by a court or regulatory body that would likely be considered important to a reasonable investor in making an investment decision.

Conflicts of Interest

To the best of our knowledge, no director or executive officer has an existing or potential material conflict of interest with us or any of our subsidiaries.

LEGAL PROCEEDINGS AND REGULATORY ACTIONS

In the ordinary course of our business, we are routinely involved in or parties to various ongoing, pending and threatened legal actions and proceedings.

A description of certain legal proceedings to which we are a party appears in Note 24 “Legal and regulatory matters” beginning on page 215 of our 2021 Annual Consolidated Financial Statements, which note is incorporated by reference herein.

Since October 31, 2020, (a) there have been no penalties or sanctions imposed against us by a court relating to Canadian securities legislation^6^ or by a Canadian securities regulatory authority^6^which are individually or in the aggregate material to the Bank, (b) there have been no other penalties or sanctions imposed by a court or regulatory body against us that would likely be considered important to a reasonable investor in making an investment decision, and (c) we have not entered into any settlement agreements with a court relating to Canadian securities legislation^6^ or with a Canadian securities regulatory authority^6^.^^

^6^ National Instrument 14-101 restricts the meaning of “securities legislation” to Canadian provincial and territorial legislation and “securities regulatory authority” to Canadian provincial and territorial securities regulatory authorities.

INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS

To the best of our knowledge, there were no directors or executive officers or any associate or affiliate of a director or executive officer with a material interest in any transaction within the three most recently completed financial years or during the current financial year that has materially affected us or is reasonably expected to materially affect us.

TRANSFER AGENT AND REGISTRAR

For Canada, Computershare Trust Company of Canada is the transfer agent and registrar for our common shares and our preferred shares. Their principal offices are in the cities of: Montreal, QC; Toronto, ON; Calgary, AB and Vancouver, BC. In the U.S., Computershare Trust Company, N.A. is the co-transfer agent located in Canton, Massachusetts, Jersey City, New Jersey and Louisville, Kentucky. In the U.K., Computershare Services PLC is the co-transfer agent located in Bristol, England.

EXPERTS

PricewaterhouseCoopers LLP (PwC), Chartered Professional Accountants, Licensed Public Accountants, audited our Annual Consolidated Financial Statements, which comprise the consolidated balance sheets as of October 31, 2021 and October 31, 2020 and the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for the years then ended, including the related notes and the effectiveness of our internal control over financial reporting as of October 31, 2021. PwC has advised that they are independent with respect to the Bank within the meaning of the Rules of Professional Conduct of the Chartered Professional Accountants of Ontario and the rules and regulations adopted by the SEC and the Public Company Accounting Oversight Board (United States).

AUDIT COMMITTEE

Audit Committee Mandate

The mandate of the Audit Committee is attached as Appendix C to this Annual Information Form.

Composition of Audit Committee

The Audit Committee consists of Frank Vettese (Chair), Cynthia Devine, Maryann Turcke, Bridget A. van Kralingen and Jeffery W. Yabuki. The board has determined that each member of the Audit Committee is independent under our Director Independence Policy, which incorporates the independence standards under applicable Canadian and U.S. laws and regulations and none receives, directly or indirectly, any compensation from us other than ordinary course compensation for service as a member of the board of directors and its committees or of a board of directors of one or more of our subsidiaries. All members of the Audit Committee are financially literate within the meaning of National Instrument 52-110 – Audit Committees and of the Corporate Governance Standards of the NYSE. In considering the criteria for determining financial literacy, the board of directors looks at the ability of a director to read and understand a balance sheet, an income statement and a cash flow statement of a financial institution. The board has determined that each of Frank Vettese, Cynthia Devine and Jeffery W. Yabuki qualifies as an “audit committee financial expert” as defined by the SEC.

Relevant Education and Experience of Audit Committee Members

In addition to each member’s general business experience, the education and experience of each Audit Committee member that is relevant to the performance of his or her responsibilities as an Audit Committee member is as follows:

Frank Vettese, B.B.A., FCA, earned his Bachelor of Business Administration from the Schulich School of Business and is a Chartered Accountant and a fellow of the Canadian Institute of Chartered Accountants. Mr. Vettese was Managing Partner and Chief Executive of Deloitte Canada from 2012 to June 2019. Mr. Vettese has been a member of the Audit Committee since July 2019.

Cynthia Devine, FCPA, FCA, HBA, earned her Honors Business Administration degree from Western University. Ms. Devine became a Fellow of the Institute of Chartered Accountants of Ontario in 2011. Ms. Devine is Chief Financial Officer of Maple Leaf Sports & Entertainment, and from 2003 to 2014 served as Chief Financial Officer of Tim Hortons Inc., and from 2015 to 2017 served as Executive Vice President, Chief Financial Officer and Corporate Secretary of RioCan Real Estate Investment Trust. Ms. Devine serves as a director and Audit Committee Chair for Empire Company Limited/Sobeys Inc. Ms. Devine has been a member of our Audit Committee since July 2020.

Maryann Turcke,B.S., M.S., M.B.A, earned her Bachelor of Science in Civil Engineering degree from Queen’s University, her Master of Science in Engineering degree from the University of Toronto and her Master of Business Administration from Queen’s University. Ms. Turcke was Chief Operating Officer of the National Football League from 2018 to 2020, President, NFL Network, Digital Media, IT and Films from 2017 to 2018 and President of Bell Media from 2014 to 2017. Ms. Turcke is Senior Advisor of Brookfield Infrastructure Partners. Ms. Turcke has been a member of our Audit Committee since January 2020.

Bridget A. vanKralingen, M.C., B.C., earned her Bachelor of Commerce from the University of the Witwatersrand, South Africa, her Master of Commerce in Industrial and Organisational Psychology from the University of South Africa, and her honours degree in commerce from the University of Johannesburg. Ms. van Kralingen is Senior Vice-President, Special Projects of IBM Corporation. Ms. van Kralingen held various senior positions at IBM Corporation from 2004 to 2021, including Senior Vice-President, Global Markets and Senior Vice-President, Global Business Services. Ms. van Kralingen was Managing Partner at Deloitte Consulting, US from 2001 to 2004. Ms. van Kralingen is a member of the boards of the New York Historical Society and the Partnership for New York City. Ms. van Kralingen has been a member of our Audit Committee since August 2021.

Jeffery W. Yabuki,B.S., earned his Bachelor of Science in Business Administration and Accounting from California State University, Los Angeles, and was previously licensed as a Certified Public Accountant. Mr. Yabuki is the Chairman of Sportradar AG. Mr. Yabuki was President and Chief Executive Officer of Fiserv, Inc. from 2005 to 2019, Chairman and Chief Executive Officer until 2020, and Executive Chairman until 2020. Mr. Yabuki held various senior positions at H&R Block, Inc. from 1999 to 2005, including the position of Executive Vice President and Chief Operating Officer. Mr. Yabuki has been a member of our Audit Committee since October 2017.

Pre-Approval Policies and Procedures

The Audit Committee has adopted a policy that requires pre-approval by the Audit Committee of audit services and other services within permissible categories of non-audit services. The policy prohibits us from engaging the auditor for “prohibited” categories of non-audit services. A copy of our Pre-Approval Policies and Procedures can be found in Appendix D.

Independent Registered Public Accounting Firm Fees

Following a tender process, PwC was appointed our auditor by the Board of Directors on January 29, 2016, which appointment was approved by the Bank’s shareholders at the Annual and Special Meeting of Common Shareholders held on April 6, 2016. Fees relating to the years ended October 31, 2021 and October 31, 2020 to PwC and its affiliates, including the nature of each category of fees, are detailed below. ****

	****	Year ended October 31, 2021<br>(Millions)				****	Year ended October 31, 2020<br>(Millions)
	Bank and Subsidiaries			Total		Bank and Subsidiaries			Total
Audit fees		38.5	2.5	****	41.0		38.6	2.4	****	41.0
Audit-related fees		8.1	-	****	8.1		8.4	-	****	8.4
Tax fees		-	0.3	****	0.3		0.1	0.3	****	0.4
All other fees		0.6	0.6	****	1.2		0.5	0.5	****	1.0
Total fees		47.2	3.4	****	50.6		47.6	3.2	****	50.8

All values are in US Dollars.

^(1)^The Mutual Funds category includes fees paid for professional services provided by PwC for certain mutual funds managed by subsidiaries of the Bank. In addition to other administrative costs, the subsidiaries are responsible for the auditors’ fees for professional services rendered in connection with the annual audit, statutory and regulatory filings and other services for the Mutual Funds in return for a fixed administration fee.

Audit Fees

Audit fees were paid for professional services rendered by the auditor for the integrated audit of the Annual Consolidated Financial Statements of the Bank, including its audit of the effectiveness of our internal control over financial reporting, and any financial statement audits of our subsidiaries. In addition, audit fees were paid for services that generally only the Bank’s independent auditor reasonably can provide, which includes services provided in connection with statutory and regulatory filings, including those related to prospectuses and other offering documents.

Audit-Related Fees

Audit-related fees were paid for assurance and related services that are reasonably related to the performance of the audit or review of our Annual Consolidated Financial Statements and are not reported under the audit fees item above. These services consisted of:

•	special attest services traditionally performed by the Bank’s independent auditor not required by statute or<br>regulation;
•	reporting on the effectiveness of internal controls as required by contract or for business reasons;<br>
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•	the audits of the financial statements of our various pension plans;
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•	the audits of various trusts and limited partnerships; and
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•	financial and reporting standards advice.
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Tax Fees

Tax fees were paid for tax compliance services including preparation of tax returns for certain mutual funds managed by subsidiaries of the bank and a subscription for services to provide specific tax data and information to complete routine tax schedules and calculations for clients.

All Other Fees

These services consist of French translation of financial statements and related continuous disclosure and other public documents containing financial information for us and certain of our subsidiaries, regulatory compliance services as well as accounting and other research publications.

ADDITIONAL INFORMATION

Additional information, including directors’ and officers’ remuneration and indebtedness, principal holders of our securities, and securities authorized for issuance under equity compensation plans, where applicable, is contained in the Bank’s Management Proxy Circular for the most recent annual meeting of shareholders. Additional financial information is provided in our Annual Consolidated Financial Statements and Management’s Discussion and Analysis which are included in our 2021 Annual Report.

Copies of this Annual Information Form, our 2021 Annual Report and Management Proxy Circular in respect of the most recent annual meeting of shareholders may be obtained from Investor Relations at 200 Bay Street, South Tower, Toronto, Ontario, M5J 2J5 **** (416-955-7802).

This Annual Information Form, the Annual Consolidated Financial Statements and Management’s Discussion and Analysis for the year ended October 31, 2021, as well as additional information about us may be found on our website at rbc.com, on SEDAR, the Canadian Securities Administrators’ website, at sedar.com, and on the EDGAR section of the SEC’s website at sec.gov.

Information contained in or otherwise accessible through the websites mentioned in this Annual Information Form does not form a part of this Annual Information Form. All references in this Annual Information Form to websites are inactive textual references and are for your information only.

TRADEMARKS

Trademarks used in this Annual Information Form include the LION & GLOBE Symbol, ROYAL BANK OF CANADA and RBC, which are trademarks of Royal Bank of Canada used by Royal Bank of Canada and/or by its subsidiaries under license. All other trademarks mentioned in this Annual Information Form, which are not the property of Royal Bank of Canada, are owned by their respective holders.

APPENDIX A – PRINCIPAL SUBSIDIARIES

(Millions of Canadian dollars)		As at October 31, 2021
Principal subsidiaries (1)	Principaloffice address (2)	Carrying value ofvoting shares ownedby the Bank (3)
Royal Bank Holding Inc.	Toronto, Ontario, Canada	$	69,976
RBC Direct Investing Inc.	Toronto, Ontario, Canada
RBC Insurance Holdings Inc.	Mississauga, Ontario, Canada
RBC Life Insurance Company	Mississauga, Ontario, Canada
R.B.C. Holdings (Bahamas) Limited	Nassau, New Providence, Bahamas
RBC Caribbean Investments Limited	George Town, Grand Cayman, Cayman Islands
Royal Bank of Canada Insurance Company Ltd.	Camana Bay, Grand Cayman, Cayman Islands
Investment Holdings (Cayman) Limited	George Town, Grand Cayman, Cayman Islands
RBC (Barbados) Funding Ltd.	St. Michael, Barbados
Capital Funding Alberta Limited	Calgary, Alberta, Canada
RBC Global Asset Management Inc.	Toronto, Ontario, Canada
RBC Investor Services Trust	Toronto, Ontario, Canada
RBC Investor Services Bank S.A.	Esch-sur-Alzette, Luxembourg
RBC (Barbados) Trading Bank Corporation	St. James, Barbados
RBC U.S. Group Holdings LLC (2)	Toronto, Ontario, Canada		23,691
RBC USA Holdco Corporation (2)	New York, New York, U.S.
RBC Capital Markets, LLC (2)	New York, New York, U.S.
City National Bank	Los Angeles, California, U.S.
RBC Dominion Securities Limited	Toronto, Ontario, Canada		12,223
RBC Dominion Securities Inc.	Toronto, Ontario, Canada
Royal Bank Mortgage Corporation	Toronto, Ontario, Canada		5,059
RBC Europe Limited	London, England		2,851
The Royal Trust Company	Montreal, Quebec, Canada		1,090
Royal Trust Corporation of Canada	Toronto, Ontario, Canada		422

(1) The Bank directly or indirectly controls each subsidiary.

(2) Each subsidiary is incorporated or organized under the laws of the state or country in which the principal office is situated, except for RBC U.S. Group Holdings LLC and RBC USA Holdco Corporation which are incorporated under the laws of the State of Delaware, U.S. and RBC Capital Markets, LLC, which is organized under the laws of the State of Minnesota, U.S.

(3) The carrying value of voting shares is stated as the Bank’s equity in such investments.

APPENDIX B – EXPLANATION OF RATINGS AND OUTLOOK

Institution	Rating	Outlook
Moody’s	● Obligations rated ‘Aa’ are judged to be of high quality and are subject to very<br>low credit risk.<br> <br>● Obligations rated ‘A’ are considered upper medium-grade and<br>are subject to low credit risk.<br> <br>● Obligations rated Baa are subject to moderate credit<br>risk. They are considered medium-grade and as such may possess speculative characteristics.<br><br><br>● Moody’s appends numerical modifiers 1, 2, and 3 to each generic rating classification<br>from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates amid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating<br>category.<br> <br>● Additionally, a “(hyb)” indicator is appended to all ratings of<br>hybrid securities issued by banks, insurers, finance companies, and securities firms.<br><br><br>● Issuers (or supporting institutions) rated Prime-1<br>have a superior ability to repay short-term debt obligations.	A Moody’s rating outlook is an opinion regarding the likely rating direction over the medium term.
Standard & Poor’s	● An obligation rated ‘AA’ differs from the highest-rated obligations only to a<br>small degree. The obligor’s capacity to meet its financial commitment on the obligation is very strong.<br><br><br>● An obligation rated ‘A’ is somewhat more susceptible to the adverse effects of<br>changes in circumstances and economic conditions than obligations in higher-rated categories. However, the obligor’s capacity to meet its financial commitments on the obligation is still strong.<br><br><br>● An obligation rated ‘BBB’ exhibits adequate protection parameters. However,<br>adverse economic conditions or changing circumstances are more likely to weaken the obligor’s capacity to meet its financial commitments on the obligation.<br><br><br>● Ratings from ‘AA’ to ‘CCC’ may be modified by the addition of a plus<br>(+) or minus (-) sign to show relative standing within the rating categories.<br> <br>● A<br>short-term obligation rated ‘A-1’ is rated in the highest category by S&P Global Ratings. The obligor’s capacity to meet its financial commitments on the obligation is strong. Within this<br>category, certain obligations are designated with a plus sign (+). This indicates that the obligor’s capacity to meet its financial commitments on these obligations is extremely strong. A short term obligation rated ‘A-1+’ has extremely strong capacity to meet its financial commitments.	An S&P Global Ratings outlook assesses the potential direction of a long-term credit rating over the intermediate term, which is<br>generally up to two years for investment grade and generally up to one year for speculative grade.

Institution	Rating	Outlook
Fitch	● ‘AA’ ratings indicate very high credit quality and denote expectations of very<br>low default risk. They indicate very strong capacity for payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events.<br><br><br>● ‘A’ ratings indicate high credit quality and denote expectations of low default<br>risk. The capacity for payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to adverse business or economic conditions than is the case for higher ratings.<br><br><br>● The modifiers “+” or “-” may be appended to a rating to denote<br>relative status within major rating categories.<br> <br>● ‘F1’ (Highest Short-Term<br>Credit Quality) ratings indicate the strongest intrinsic capacity for timely payment of financial commitments; may have an added “+” to denote any exceptionally strong credit feature.	Outlooks indicate the direction a rating is likely to move over a one- to two-year period. They reflect financial or other trends that have not yet reached or been sustained the level that would cause a rating action, but which may do so if such trends continue.
DBRS	● An obligation rated ‘AA’ is of superior credit quality. The capacity for the<br>payment of financial obligations is considered high. Credit quality differs from AAA only to a small degree. Unlikely to be significantly vulnerable to future events.<br><br><br>● An obligation rated ‘A’ is of good credit quality. The capacity for the payment<br>of financial obligations is substantial, but of lesser credit quality than AA. May be vulnerable to future events, but qualifying negative factors are considered manageable.<br><br><br>● All long term obligation rating categories other than AAA and D also contain subcategories<br>(high) and (low). The absence of either a (high) or (low) designation indicates the rating is in the middle of the category.<br><br><br>● R-1 (high) ratings indicate the highest credit<br>quality. The capacity for the payment of short-term financial obligations as they fall due is exceptionally high. Unlikely to be adversely affected by future events.<br><br><br>● Preferred shares rated Pfd-1 are generally of<br>superior credit quality and are supported by entities with strong earnings and balance sheet characteristics. Pfd-1 ratings generally correspond with issuers with a AAA or AA category reference point.<br><br><br>● Preferred shares rated Pfd-2 are generally of good<br>credit quality. Protection of dividends and principal is still substantial, but earnings, the balance sheet and coverage ratios are not as strong as Pfd-1 rated companies. Generally, Pfd-2 ratings correspond with issuers with an A category or higher reference point.	Rating Trends provide guidance in respect of DBRS Morningstar’s opinion regarding the outlook for a rating. The Rating Trend indicates<br>the direction in which DBRS Morningstar considers the rating may move if present circumstances continue, or in certain cases as it relates to the Corporate Finance sector, unless challenges are addressed by the issuer.

WHAT THE RATINGS ADDRESS:

Short-term and Long-term Senior Debt

Short-term and long-term senior debt credit ratings are the current opinion of the rating agency on creditworthiness of an obligor with respect to fixed-income obligations whose original maturity is of a short and medium to long-term nature, respectively. They address the possibility that a financial obligation will not be honoured as promised and reflect both the likelihood of default and any financial loss suffered in the event of default.

Subordinated Debt

Subordinated debt credit ratings are the current opinion of the rating agency on creditworthiness of an obligor with respect to a specific financial obligation and a specific class of financial obligation for a specific financial program. Ratings take into consideration the creditworthiness of guarantors, insurers, or other forms of credit enhancement on the obligation and takes into account the currency in which the obligation is denominated.

Preferred Stock

Preferred stock ratings address the issuer’s capacity and willingness to pay dividends and principal, in case of limited life, on a timely basis. They address the likelihood of timely payment of dividends, notwithstanding the legal ability to pass on or defer a dividend payment.

Rating Outlook

Rating Outlook assesses the potential direction of a credit rating over the intermediate to longer term. In determining a Rating Outlook consideration is given to any changes in the economic and fundamental business conditions. An Outlook is not necessarily a precursor of a rating change.

APPENDIX C – AUDIT COMMITTEE MANDATE

ROYAL BANK OF CANADA

(the Bank)

May 26, 2021

AUDIT COMMITTEE MANDATE

A.	PURPOSE AND DUTIES OF THE COMMITTEE
1.	General Purpose
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The Committee is responsible for assisting the Bank’s board of directors (the Board) in its oversight of (i) the integrity of the Bank’s financial statements; (ii) the qualifications, performance and independence of the external auditors; (iii) the performance of the Bank’s internal audit function; (iv) internal controls; and (v) compliance with legal and regulatory requirements.

2.	Financial Statements and other Documents

The Committee will regularly review and discuss the following:

a)	prior to review and approval by the Board, the Bank’s annual statement which includes its annual<br>consolidated financial statements, its quarterly financial statements, and related management’s discussion and analysis;
b)	earnings releases on interim and annual results, the annual information form, the annual report and other<br>financial information, earnings guidance and presentations provided to analysts, rating agencies and the public;
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c)	such other periodic disclosure documents as requested by regulators or that may be required by law;<br>
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d)	investments and transactions brought to the Committee’s attention that could adversely affect the<br>Bank’s well-being;
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e)	prospectuses relating to the issuance of securities of the Bank;
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f)	representations provided by management to the auditors, where appropriate;
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g)	reports on any litigation matters which could significantly affect the Bank;
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h)	tax matters that are material to the financial statements;
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i)	reports from the Chief Compliance Officer (the CCO) on regulatory compliance matters, and from the Chief<br>Anti-Money Laundering Officer (the CAMLO) on anti-money laundering matters; and
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j)	other reports as required to be communicated by the auditors by the Canadian Public Accountability Board, the<br>Office of the Superintendent of Financial Institutions, and the U.S. Public Company Accounting Oversight Board.
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Moreover, the Committee will ensure that adequate procedures are in place for the review of the Bank’s public disclosure of financial information derived from the Bank’s financial statements, and will periodically assess the adequacy of these procedures.

3.	External Auditor

Subject to the shareholders’ powers conferred by the Bank Act, the Committee will recommend the appointment (or revocation thereof) of any registered public accounting firm (including the external auditor) engaged to prepare or issue an audit report or to perform other audit, review or attest services. The Committee will fix the remuneration and oversee the work of these accounting firms, including the resolution of disagreements with management regarding financial reporting. Such accounting firms will report directly to the Committee.

Moreover, as part of its oversight of the external auditor the Committee will:

a)	meet with the external auditor to review and discuss the annual audit plan, the results of the audit, the<br>auditor’s report with respect to the annual statement, and all other reports, returns and transactions as required by applicable laws;
b)	approve all audit engagement fees and terms, as well as the terms of any permitted non-audit services to be provided by the external auditor to the Bank, with such approvals to be given specifically or pursuant to preapproval policies and procedures adopted by the Committee in accordance with<br>applicable laws;
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c)	review any concerns that may be brought forward by the external auditor, including any difficulties they may<br>encounter in conducting their audit, as well as management’s response to such concerns;
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d)	review material correspondence between the external auditor and management relating to audit findings;<br>
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e)	taking into account the opinions of management and the Bank’s internal auditor, annually assess the<br>external auditor’s qualifications and performance, including relevant experience, geographical reach, professional scepticism, quality of services and communications, and independence and objectivity;
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f)	review formal written statements delineating all relationships between the external auditor and the Bank that<br>may impact its independence and objectivity;
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g)	annually assess the risk of the external auditor withdrawing from the audit;
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h)	discuss with the external auditor and with management the annual audited financial statements and quarterly<br>financial statements, as well as related management’s discussion and analysis;
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i)	review hiring policies concerning partners, employees and former partners and employees of the present and<br>former external auditors;
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j)	review and evaluate the qualifications, performance and independence of the external auditor’s lead<br>partner and discuss the timing and process for implementing the rotation of the lead audit partner, the concurring audit partners and any other active audit engagement team partner;
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k)	on a periodic basis, perform a comprehensive review of the performance of the External Auditor over multiple<br>years to assess the audit firm, its independence and application of professional skepticism; and
l)	at least annually, obtain and review a report by the external auditor describing: (i) the external<br>auditor’s internal quality- control procedures; (ii) the external auditor’s internal procedures to ensure independence; and (iii) any material issues raised by the most recent internal quality-control review or peer review of the<br>external auditors, or by any inquiry or investigation by governmental or professional authorities, within the preceding five years, respecting one or more independent audits carried out by the external auditor, and any steps taken to deal with any<br>such issues.
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4.	Oversight of Independent Control Functions
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The Committee will oversee the finance, compliance, anti-money laundering and internal audit functions, having regard to their independence from the businesses whose activities they review. The Committee will review and approve the appointment or removal of each of the Chief Financial Officer (the CFO), the CCO, the CAMLO, and the Chief Audit Executive (the CAE), as well as their respective mandates and the mandates or charters of their respective functions. The Committee will approve each of the functions’ organizational structures, budgets and resources. Every year the Committee will assess the performance of each of the CFO, CCO, CAMLO and CAE and the effectiveness their respective functions. It will also periodically review independent assessments of each of these functions. Moreover, it will annually review and approve the internal audit function’s overall risk methodology.

5.	Internal Control

The Committee will assist in the oversight of internal control by engaging in the following activities:

a)	requiring management to implement and maintain appropriate systems of internal control, including internal<br>controls over financial reporting and for the prevention and detection of fraud and error;
b)	evaluating and approving systems of internal control and meeting regularly with the CAE and with management to<br>assess the adequacy and effectiveness of these systems;
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c)	receiving reasonable assurances on a regular basis from management that the organization is in control;<br>
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d)	reviewing reports from the Chief Executive Officer (the CEO) and the CFO regarding any significant deficiency<br>or material weakness in the design or operation of internal controls over financial reporting and the detection of fraud involving management or other employees who have a significant role in the Bank’s internal control over financial<br>reporting;
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e)	reviewing and approving the Bank’s disclosure policy and reviewing reports on the effectiveness of the<br>Bank’s disclosure controls and procedures;
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f)	reviewing the process relating to the CEO and CFO’s certifications on the design and effectiveness of the<br>Bank’s disclosure controls and procedures and internal control over financial reporting, and the integrity of the Bank’s quarterly and annual financial statements.
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6.	Internal Auditor

The Committee will regularly meet with the CAE to review and approve the annual internal audit plan and review internal audit activities. The Committee will review and discuss with the CAE issues reported to management by the internal audit function and management’s responses and/or corrective actions. The Committee will also evaluate the status of identified control weaknesses, as well as the adequacy and degree of compliance with the Bank’s systems of internal control. Other issues that the Committee may review with the CAE include audit scope, information access, resource limitations or any other difficulties encountered by the internal audit function.

7.	Capital Management

The Committee will review capital transactions and may designate and authorize the issue of (i) First Preferred Shares and (ii) securities qualifying as additional Tier 1 capital under capital adequacy guidelines issued by the Superintendent of Financial Institutions. The Committee may also review and approve securities disclosure documents in connection with issues of the Bank’s subordinated indebtedness as provided in the relevant resolution of the Board.

The Committee will review the adequacy and effectiveness of internal controls related to capital management. It will also discuss with the external auditors any matters arising from the audit that may have an impact on regulatory or capital disclosures included in the Bank’s annual statement.

8.	Committee Reports

The Committee is responsible for preparing any report from the Committee that may be included in the Bank’s annual proxy statement.

9.	Other
a)	The Committee will discuss major issues regarding accounting principles and financial statement presentations,<br>including significant changes in the Bank’s selection or application of accounting principles and analyses prepared by management or the external auditors regarding financial reporting issues and judgments made in connection with the<br>preparation of the financial statements;
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b)	The Committee will establish procedures for managing complaints received by the Bank regarding accounting,<br>internal accounting controls or auditing matters, as well as procedures for the confidential and anonymous submission by employees of concerns regarding accounting, internal accounting controls or auditing matters. The Committee will receive reports<br>from the Ombudsman at each Committee meeting and will meet with the Ombudsman annually in relation to these procedures;
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c)	The Committee will review and discuss any reports concerning material violations submitted to it by the<br>Bank’s legal counsel pursuant to applicable law and policy;
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d)	The Committee will discuss the major financial risk exposures of the Bank and the steps management has taken to<br>monitor and control such exposures;
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e)	Subject to the laws applicable to the subsidiary, the Committee may perform for and on behalf of a subsidiary<br>the functions of an audit committee of the subsidiary.
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B.	COMMITTEE COMPOSITION AND PROCEDURES
1.	Composition of Committee
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The Committee will be composed of five or more directors. No Committee member may be an officer or employee of the Bank or of an affiliate of the Bank. Each Committee member will be (i) unaffiliated, as determined in accordance with the regulations made under the Bank Act, and (ii) independent, as determined by director independence standards adopted by the Board. Committee membership will reflect a balance of experience and expertise required to fulfill the Committee’s mandate.

All Committee members will be financially literate or become financially literate within a reasonable period after appointment to the Committee. At least one member will have accounting or financial management expertise. No member may serve on the audit committees of more than two other public companies, unless the Board determines such simultaneous service would not impair the member’s ability to serve effectively on the Committee.

2.	Appointment of Committee Members

The Board will appoint or reappoint the Committee members at the annual organizational meeting of the directors. In the normal course members will serve a minimum of three years. Each member will remain a member until a successor is appointed, unless the member resigns, is removed or ceases to be a director. The Board may fill a vacancy that occurs in the Committee at any time.

3.	Committee Chair and Secretary

The Board will appoint or reappoint a Committee Chair from among the members of the Committee. If the Board fails to do so, the Committee members will make the appointment or re-appointment. In the normal course the Committee Chair will serve a minimum of three years. The Committee Chair will not be a former employee of the Bank or of an affiliate. The Secretary of the Committee need not be a director.

4.	Time and Place of Meetings

Meetings may be called by any Committee member, the external auditors, the CFO, the Board Chair, the CEO or the Chief Audit Executive. The Committee members will determine the time and place of and the procedure at meetings, provided that the Committee meets at least quarterly. The Committee members may participate in meetings in person or by telephone, electronic or other communications facilities. The Committee may request any officer or employee of the Bank or the Bank’s outside counsel or external auditors to attend a meeting of the Committee or to meet with any members of, or consultants to, the Committee.

5.	Quorum

A quorum for meetings will be three members.

6.	Notice of Meetings

Notice of the time and place of each meeting will be generally given in writing or by telephone, or by electronic or other communications facilities, to each Committee member and to the external auditors at least 24 hours prior to the time fixed for such meeting; however,

a)	a member may in any manner waive notice of a meeting and attendance of a member at a meeting is a waiver of<br>notice of the meeting, except where a member attends a meeting for the express purpose of objecting to the transaction of any business on the grounds that the meeting is not lawfully called;
b)	a resolution in writing signed by all the members entitled to vote on that resolution at a Committee meeting,<br>other than a resolution of the Committee carrying out its duties under subsection 194(3) of the Bank Act, will be as valid as if it had been passed at a meeting of the Committee; and
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c)	capital transactions may be reviewed and/or authorized at a meeting of which at least one hour prior notice is<br>given.
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7.	Delegation
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The Committee may designate a sub-committee to review any matter within the Committee’s mandate.

8.	Reporting to the Board

The Committee will report to the Board following each meeting with respect to its activities and recommendations. It will also report to the Board on the annual statement and returns that must be approved by the directors under the Bank Act.

9.	Access to Management and External Advisors

In fulfilling its responsibilities, the Committee will have unrestricted access to management and employees of the Bank. The Committee will select, retain, oversee, terminate and approve the fees of any external advisor that the Committee deems necessary, including any legal or accounting advisor, to assist it in fulfilling its responsibilities. The Bank will provide appropriate funding, as determined by the Committee, for any such engagement.

The Committee may also investigate any matter with full access to all books, records, facilities, management and employees of the Bank.

10.	Private Meetings

At least quarterly the Committee will meet with no members of management present and have separate private meetings with the external auditors, and each of the CAE, the CFO, the CCO, the CAMLO and the General Counsel, to discuss any matters that the Committee or these parties believe should be discussed.

11.	Minutes

Minutes of meetings of the Committee will be maintained by the Secretary and subsequently presented to the Committee and to the Board, if required by the Board.

12.	Evaluation of Effectiveness and Review of Mandate

The Committee will annually review and assess the adequacy of its mandate and evaluate its effectiveness in fulfilling its mandate.

APPENDIX D – PRE-APPROVAL POLICIES AND PROCEDURES

Policies andProcedures

for the Monitoring, and Pre-Approval of Services

to be Performed by Public Accounting Firms

and the Review of the External Auditors

(effective January 28, 2020)

Mandate

1.	The mandate of the Audit Committee established by the Board of Directors (“Board”) confers on the<br>Audit Committee the authority and responsibility (among other things) to:
•	Pre-approve all audit and any legally permissible non-audit services to be provided by the external auditors and all audit, review and attest services provided by any other public accounting firm, with such approval to be given either specifically or pursuant to pre-approval policies and procedures adopted by the Audit Committee; and
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•	To complete an annual and five year comprehensive reviews of the external auditor’s performance and to<br>recommend to the Board the selection and termination of the external auditor subject to shareholder approval.
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Purpose

2.	These Policies and Procedures are intended to:
a)	specify the methods by which the Audit Committee may pre-approve the<br>provision of audit, review and attest services by any public accounting firm to the Bank and its subsidiaries;
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b)	specify the methods by which the Audit Committee may pre-approve the<br>provision of non-audit services to the Bank and its subsidiaries by the Bank’s external auditors and their affiliates (the “auditors”) that do not impair the independence of the auditors under<br>applicable laws and professional standards, including the rules of the Chartered Professional Accountants Canada, the Public Company Accounting Oversight Board (“PCAOB”), the Canadian Securities Administrators and the U.S. Securities and<br>Exchange Commission;
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c)	set forth procedures designed to ensure that any services to be provided by the auditors and that any audit,<br>review or attestation services to be performed by any other public accounting firm have been properly authorized and pre-approved under the authority of the Audit Committee, and that the Audit Committee is<br>promptly informed of each service;
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d)	ensure that the Audit Committee’s responsibilities are not delegated to management in violation of<br>applicable law;
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e)	specify the policies relating to the annual and comprehensive evaluation of the external auditor and selection<br>of the external auditor by the Audit Committee for recommendation to the Board.
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Required Approval of Audit and Non-Audit Services

3.	The Audit Committee shall pre-approve all engagements of the auditors<br>by:
a)	the Bank; or
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b)	any subsidiary.
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4.	The Audit Committee shall pre-approve all engagements of any public accounting firm to provide audit, review or<br>attest services to:
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a)	the Bank; or
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b)	any subsidiary.
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5.	The Audit Committee shall evidence its pre-approval by resolution of<br>the Audit Committee or through the exercise of delegated authority in accordance with these Policies and Procedures.
6.	“Subsidiary” has the meaning set forth in Rule 1-02(x) of the<br>U.S. Securities and Exchange Commission’s Regulation S-X.
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7.	For the purpose of these Policies and Procedures and any pre-approval:<br>
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a)	“Audit services” include services that are a necessary part of the audit process and any activity<br>that is a necessary procedure used by the accountant in reaching opinions on the financial statements and on internal control over financial reporting as is required under applicable auditing standards (“AAS”), including technical reviews<br>to reach an audit judgment on complex accounting issues;
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b)	The term “audit services” is broader than those services strictly required to perform an audit<br>pursuant to AAS and include such services as:
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i)	the issuance of comfort letters and consents in connection with offerings of securities;
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ii)	the performance of domestic and foreign statutory audits;
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iii)	attest services required by statute or regulation; and
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iv)	assistance with and review of documents filed with the Office of the Superintendent of Financial Institutions,<br>Canadian Securities Administrators, the Securities and Exchange Commission, the Board of Governors of the Federal Reserve Board and other regulators having jurisdiction over the activities of the Bank and its subsidiaries, and responding to comments<br>from such regulators;
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c)	“Audit-related” services are assurance and related services traditionally performed by the principal<br>accountant and that are reasonably related to the performance of the audit or review of financial statements and not categorized under “audit fees” for disclosure purposes.
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“Audit-related services” include:

i)	employee benefit plan audits, including audits of employee pension plans,
ii)	due diligence related to mergers and acquisitions,
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iii)	consultations and audits in connection with acquisitions, including evaluating the accounting treatment for<br>proposed transactions;
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iv)	internal control reviews;
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v)	attest services not required by statute or regulation; and
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vi)	consultations regarding financial accounting and reporting standards.
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Non-financial operational audits are not “audit-related” services;

“Review services” are services applied to unaudited financial statements and consist of the inquiry and analytical procedures that provide the accountant with a reasonable basis for expressing limited assurance that there are no material modifications that should be made to financial statements for them to be in conformity with International Financial Reporting Standards or, if applicable, any other comprehensive basis of accounting;

“Attest” services are those engagements where the accountant issues an examination, a review, or an agreed-upon procedures report on a subject matter, or an assertion about the subject matter that is the responsibility of another party. Examples of the subject matter of an “attest” engagement include: examinations (i.e., audits) of financial forecasts and projections; reviews of pro-forma financial information; reporting on a company’s internal control over financial reporting; and examinations of compliance with contractual arrangements or laws and regulations.

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f)	A “subsidiary” of a specified person is an affiliate controlled by such person directly, or<br>indirectly through one or more intermediaries.

External Auditor Selection and Appointment

8.	The Audit Committee shall monitor, review and assess the quality of the external auditor on an annual basis.<br>The annual assessment will include:
a)	quality and thoroughness of the audit approach and methodology;
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b)	level of professional skepticism, and critical judgments applied by the audit team;
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c)	independence of the external audit firm and the engagement partner;
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d)	skills and knowledge of the audit team;
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e)	level of understanding of our businesses and the financial services industry;
---	---
f)	sufficiency of resources and ability to complete the audit in a timely manner;
---	---
g)	partner rotation;
---	---
h)	value for money;
---	---
i)	quality of communications;
---	---
j)	risk of likelihood of withdrawal from the audit;
---	---
k)	input from senior management of RBC;
---	---
l)	input from RBC Internal Audit Services;
---	---
m)	a self assessment prepared by the auditor; and
---	---
n)	audit quality metrics and other matters as determined by the Audit Committee or the Board of Directors.<br>
---	---
9.	At least every five years the Audit Committee will conduct a comprehensive assessment of the external auditor.<br>The assessment will include:
---	---
a)	considerations included within the annual assessment;
---	---
b)	performance since the last comprehensive review, or appointment of the external auditor;
---	---
c)	quality and continuity of the engagement team;
---	---
d)	tenure of the auditor;
---	---
e)	incidence of independence threats and effectiveness of applied safeguards;
---	---
f)	track record of the auditor applying professional skepticism; and
---	---
g)	responsiveness to changes in the Bank’s businesses (i.e. significant acquisitions or changes to systems)<br>and calls for improvement from regulators, inspectors, Audit Committees or management.
---	---
10.	The Audit Committee will take the following into account in deciding whether to recommend the tendering of the<br>external audit engagement of the Bank:
---	---
a)	the results of the annual and comprehensive assessments (refer to factors described in sections 8 and 9);<br>
---	---
b)	the impact of regulatory and legislative requirements, including mandatory tendering and rotation requirements<br>on the Bank and its subsidiaries; and
---	---
c)	other factors deemed relevant by the Audit Committee or the Board.
---	---

Delegation

11.	The Audit Committee may from time to time delegate to one or more of its members who are<br>“independent” (within the meanings of applicable law and the rules or policies of a securities commission having jurisdiction, and the New York Stock Exchange) the power to pre-approve from time to<br>time:
a)	audit, review or attest services to be provided by any public accounting firm (including the auditors) that<br>have not been otherwise approved by the Audit Committee;
---	---
b)	permissible non-audit services to be provided by the auditors that have<br>not otherwise been approved by the Audit Committee, and
---	---
c)	changes in the scope of pre-approved engagements and the maximum<br>estimated fees for engagements that have been pre-approved by the Audit Committee.
---	---

12.	The member(s) exercising such delegated authority must report at the next regularly scheduled meeting of the<br>Audit Committee any services that were pre-approved under this delegated authority since the date of the last regularly scheduled meeting.
13.	The member(s) exercising delegated authority may evidence his or her approval by signing an instrument in<br>writing that describes the engagement with reasonable specificity, or by signing an engagement letter containing such a description.
---	---
14.	In addition, member(s) exercising delegated authority may pre-approve<br>an engagement orally, if any such oral approval is promptly confirmed in writing. Such written confirmation may be given by fax or e-mail and must describe the engagement with reasonable specificity.<br>
---	---
15.	The Audit Committee may pre-approve a limited ($500,000) management fee<br>addendum budget on an annual basis relating to fees that may arise subsequent to submission of fees for approval at the next scheduled meeting of the Audit Committee for engagements required to be completed in advance of the next scheduled meeting<br>of the Audit Committee. Any engagement subject to this budget will be limited to those with little or no risk of independence breaches, and will be reported to the Audit Committee at the next scheduled meeting held following the end of each fiscal<br>quarter end. The limitation on the scope of services only extend to: (i) addendums to existing statutory audit engagements, (ii) new audit and audit-related engagements; and (iii) audit-related services related to Service Organization<br>Control 1 reports and include a limitation on fee increases to on-half or less of the original pre-approved fee, capped at a maximum of $100,000 per engagement.<br>
---	---

Responsibilities of External Auditors

16.	To support the independence process, the external auditors shall:
a)	confirm in engagement letters that performance of the work will not impair independence;
---	---
b)	satisfy the Audit Committee that they have in place comprehensive internal policies and processes to ensure<br>adherence, world-wide, to independence requirements, including robust monitoring and communications;
---	---
c)	provide communication and confirmation to the Audit Committee on independence on a regular basis, and at least<br>annually;
---	---
d)	provide for Audit Committee approval, in connection with each annual audit engagement, a detailed scope of<br>services outlining each individual audit to be performed and a detailed description of audit-related services;
---	---
e)	utilize the tracking numbers assigned by management to all pre-approved<br>services in all fee billings and correspondence, provide detailed annual fee reporting and review management’s detailed quarterly fee reporting.
---	---
f)	communicate to the Audit Committee all matters required to be communicated by the Canadian Public<br>Accountability Board and U.S. Public Company Accounting Oversight Board.
---	---
g)	maintain certification by the Canadian Public Accountability Board and registration with the U.S. Public<br>Company Accounting Oversight Board; and
---	---
h)	review their partner rotation plan and advise the Audit Committee on an annual basis.
---	---

Engagements

17.	The Audit Committee will not, as a general rule, pre-approve a service<br>more than one year prior to the time at which it is anticipated that the firm of accountants will be engaged to provide the service.
18.	Engagements will not be considered to be revolving in nature and may not operate from year-to-year without reapproval.
---	---
19.	All audit and non-audit services to be provided by the auditors, and<br>all audit, review or attest services to be provided by any public accounting firm, shall be provided pursuant to an engagement letter that shall:
---	---

a)	be in writing and signed by the auditors or public accounting firm;
b)	specify the particular services to be provided;
---	---
c)	specify the period in which the services will be performed;
---	---
d)	specify the maximum total fees to be paid; and
---	---
e)	in the case of engagements of the auditors, include a confirmation by the auditors that the services are not<br>within a category of services the provision of which would impair their independence under applicable law and Canadian and U.S. generally accepted auditing standards.
---	---
20.	Management shall, before signing and delivering an engagement letter on behalf of the Bank or a subsidiary and<br>before authorizing the commencement of an engagement:
---	---
a)	obtain an engagement letter in accordance with these Policies and Procedures;
---	---
b)	confirm that the services are described in the engagement letter accurately and with reasonable specificity;<br>
---	---
c)	obtain confirmation from the auditors that they have conducted an analysis that supports their conclusion that<br>performance of the services will not impair their independence;
---	---
d)	with respect to engagements for the provision of services other than audit and audit-related services, obtain<br>confirmation from legal counsel of the Bank that performance of the services will not impair independence; and
---	---
e)	verify that the performance of the services has specifically been approved by the Audit Committee or a member<br>in accordance with authority delegated by the Audit Committee.
---	---

All engagement letters entered into pursuant to these Policies and Procedures shall be made available to the Audit Committee.

Tax Services

21.	The Audit Committee, and any member in the exercise of delegated power, shall consider the provision of tax<br>services by the auditors on an engagement-by-engagement basis.
22.	The Audit Committee shall not pre-approve, and any member of the Audit<br>Committee may not exercise delegated power to engage the auditors to provide, tax services to the Bank or a subsidiary:
---	---
a)	to represent the Bank or a subsidiary before a tax or other court;
---	---
b)	if the provision of the services would be prohibited, as prescribed by paragraph 26 of these Policies and<br>Procedures; or
---	---
c)	related to marketing, planning or opinion in favour of the tax treatment of (1) a transaction offered<br>under conditions of confidentiality and for which a fee has been or will be paid by the Bank; or (2) a transaction that was initially recommended directly or indirectly, by the accountant and a significant purpose of which is tax avoidance,<br>unless the proposed tax treatment is at least more likely than not to be allowable under applicable tax laws.
---	---
23.	The Audit Committee shall not pre-approve, and any member of the Audit<br>Committee may not exercise delegated power to engage the auditors to provide, tax services to a person in a financial oversight role at the Bank, or an immediate family member of such a person, except as would be permitted by the PCAOB rules.<br>
---	---

Other Non-Audit Services

24.

The Audit Committee, and any member in the exercise of delegated power, shall consider the provision of other non-audit services (non-audit services other than audit-related services and tax services, and including non-audit services relating to internal control and business recovery services) by the auditors on an engagement-by-engagement basis. Any approval of non-audit services relating to internal control must be preceded by a discussion with the auditors of the potential effects of the services on independence as required by the rules of the PCAOB.

Value-Added Services

25.

The Audit Committee recognizes and approves of the fact that the auditors from time to time provide, without charge or commitment, value added services to the Bank and its subsidiaries that do not involve an engagement of the auditors. Such value added services may include surveys, educational sessions, workshops, roundtable meetings with peers, benchmarking studies, and monitoring of contest draws as an independent observer. The Audit Committee receives and reviews periodic reports from management and the auditors providing representative examples of such services as part of its monitoring of the Bank’s overall relationship with the auditors.

Prohibited Services

26.	The Audit Committee shall not pre-approve, and any member may not<br>exercise delegated power to engage the auditors to provide, any services, including tax services or business recovery services, that (i) provide for a contingency or commission fee arrangement; or (ii) involve the auditors performing any<br>of the non-audit services set forth in paragraph (c)(4) of Rule 2-01 of the U.S. Securities and Exchange Commission’s Regulation<br>S-X, which include:
a.	providing bookkeeping or other services related to the accounting records or financial statements of the Bank<br>or any of its subsidiaries,
---	---
b.	providing financial information systems design and implementation to the Bank or any of its subsidiaries,<br>
---	---
c.	providing actuarial services to the Bank or any of its subsidiaries,
---	---
d.	providing internal audit outsourcing services to the Bank or any of its subsidiaries,
---	---
e.	providing human resources services to the Bank or any of its subsidiaries,
---	---
f.	providing broker-dealer, investment adviser, or investment banking services to the Bank or any of its<br>subsidiaries,
---	---
g.	functioning in the role of management for the Bank or any of its subsidiaries,
---	---
h.	auditing their own work in relation to the Bank or any of its subsidiaries,
---	---
i.	providing appraisal or valuation services, contribution in kind reports or fairness opinions to the Bank or any<br>of its subsidiaries,
---	---
j.	serving in an advocacy role for the Bank or any of its subsidiaries,
---	---
k.	providing legal services to the Bank or any of its subsidiaries,
---	---
l.	providing services that fall within the category of “expert” services that are prohibited by<br>applicable law to the Bank or any of its subsidiaries, or
---	---
m.	providing services to the Bank or any of its subsidiaries that would otherwise compromise their independence<br>under applicable regulatory guidance.
---	---

For the purposes of the Prohibited Services listed in this Section 26 above, a “subsidiary” includes any entity for which the Bank uses the equity method of accounting and where it is material to the Bank. Therefore, the Audit Committee is not permitted to pre-approve the provision of the prohibited services listed above by the auditors to these entities.

Timely Reporting to the Audit Committee

27.	Management shall provide a quarterly written report to the Audit Committee of services performed and related<br>fees, at the scheduled meeting of the Audit Committee held following the end of each fiscal quarter end.

No Delegation toManagement

28.	Nothing in these Policies and Procedures shall be interpreted as a delegation to management of the Audit<br>Committee’s responsibilities in violation of applicable law.

Effective Date

29.	These updated Policies and Procedures are effective as and from January 28, 2020.

Disclosure

30.	The Bank shall disclose these Policies and Procedures in its periodic filings, as required by applicable law.<br>

Review

31.	The Audit Committee shall review and reassess the adequacy of these Policies and Procedures on a triennial<br>basis.

EX-2

Exhibit 2

Management’s Discussion and Analysis

Management’s Discussion and Analysis (MD&A) is provided to enable a reader to assess our results of operations and financial condition for the fiscal year ended October 31, 2021, compared to the preceding fiscal year. This MD&A should be read in conjunction with our 2021 Annual Consolidated Financial Statements and related notes and is dated November 30, 2021. All amounts are in Canadian dollars, unless otherwise specified, and are based on financial statements presented in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB), unless otherwise noted. Additional information about us, including our 2021 Annual Information Form, is available free of charge on our website at rbc.com/investorrelations, on the Canadian Securities Administrators’ website at sedar.com and on the EDGAR section of the United States (U.S.) Securities and Exchange Commission’s (SEC) website at sec.gov. Information contained in or otherwise accessible through the websites mentioned herein does not form part of this report. All references in this report to websites are inactive textual references and are for your information only.

Table of contents

Caution regarding forward-looking statements	13
Overview and outlook	14
Selected financial and other highlights	14
About Royal Bank of Canada	15
Vision and strategic goals	15
Economic, market and regulatory review and outlook	15
Defining and measuring success through total shareholder returns	16
Impact of COVID-19 pandemic	17
Financial performance	20
Overview	20
Impact of foreign currency translation	20
Total revenue	21
Provision for credit losses	22
Insurance policyholder benefits, claims and acquisition expense	22
Non-interest expense	22
Income and other taxes	23
Client assets	23
Business segment results	24
Results by business segment	24

How we measure and report our business segments	25
Key performance and non-GAAP measures	26
Personal & Commercial Banking	27
Wealth Management	32
Insurance	38
Investor & Treasury Services	41
Capital Markets	43
Corporate Support	47
Quarterly financial information	47
Fourth quarter performance	47
Quarterly results and trend analysis	48
Financial condition	49
Condensed balance sheets	49
Off-balance sheet arrangements	50
Risk management	52
Top and emerging risks	52
Overview	55
Enterprise risk management	56
Transactional/positional risk drivers	60
Credit risk	60
Market risk	72
Liquidity and funding risk	78

Insurance risk	91
Operational/regulatory compliance risk drivers	91
Operational risk	91
Regulatory compliance risk	93
Strategic risk drivers	93
Strategic risk	93
Reputation risk	93
Legal and regulatory environment risk	94
Competitive risk	95
Macroeconomic risk drivers	96
Systemic risk	96
Overview of other risks	96
Capital management	100
Accounting and control matters	109
Critical accounting policies and estimates	109
Controls and procedures	112
Related party transactions	113
Supplementary information	113
Glossary	121
Enhanced Disclosure Task Force recommendations index	123
Caution regarding forward-looking statements
---

From time to time, we make written or oral forward-looking statements within the meaning of certain securities laws, including the “safe harbour” provisions of the United States Private Securities Litigation Reform Act of 1995 and any applicable Canadian securities legislation. We may make forward-looking statements in this 2021 Annual Report, in other filings with Canadian regulators or the SEC, in other reports to shareholders, and in other communications. Forward-looking statements in this document include, but are not limited to, statements relating to our financial performance objectives, vision and strategic goals, climate related goals, the Economic, market, and regulatory review and outlook for Canadian, U.S., European and global economies, the regulatory environment in which we operate, the Strategic priorities and Outlook sections for each of our business segments, the risk environment including our credit risk, market risk, liquidity and funding risk, and the potential continued impacts of the coronavirus (COVID-19) pandemic on our business operations, financial results, condition and objectives and on the global economy and financial market conditions and includes our President and Chief Executive Officer’s statements. The forward-looking information contained in this document is presented for the purpose of assisting the holders of our securities and financial analysts in understanding our financial position and results of operations as at and for the periods ended on the dates presented, as well as our financial performance objectives, vision and strategic goals, and may not be appropriate for other purposes. Forward-looking statements are typically identified by words such as “believe”, “expect”, “foresee”, “forecast”, “anticipate”, “intend”, “estimate”, “goal”, “plan” and “project” and similar expressions of future or conditional verbs such as “will”, “may”, “should”, “could” or “would”.

By their very nature, forward-looking statements require us to make assumptions and are subject to inherent risks and uncertainties, which give rise to the possibility that our predictions, forecasts, projections, expectations or conclusions will not prove to be accurate, that our assumptions may not be correct and that our financial performance objectives, vision and strategic goals will not be achieved. We caution readers not to place undue reliance on these statements as a number of risk factors could cause our actual results to differ materially from the expectations expressed in such forward-looking statements. These factors – many of which are beyond our control and the effects of which can be difficult to predict – include: credit, market, liquidity and funding, insurance, operational, regulatory compliance (which could lead to us being subject to various legal and regulatory proceedings, the potential outcome of which could include regulatory restrictions, penalties and fines), strategic, reputation, competitive, legal and regulatory environment, and systemic risks and other risks discussed in the risk sections and Impact of COVID-19 pandemic section of this 2021 Annual Report including business and economic conditions, information technology and cyber risks, environmental and social risk (including climate change), digital disruption and innovation, Canadian housing and household indebtedness, geopolitical uncertainty, privacy, data and third-party related risks, regulatory changes, culture and conduct, the business and economic conditions in the geographic regions in which we operate, the effects of changes in government fiscal, monetary and other policies, tax risk and transparency, and the emergence of widespread health emergencies or public health crises such as pandemics and epidemics, including the COVID-19 pandemic and its impact on the global economy, financial market conditions and our business operations, and financial results, condition and objectives. In addition, as we work to advance our climate goals, external factors outside of RBC’s reasonable control may act as constraints on their achievement, including varying decarbonization efforts across economies, the need for thoughtful climate policies around the world, more and better data, reasonably supported methodologies, technological advancements, the evolution of consumer behaviour, the challenges of balancing interim emissions goals with an orderly and just transition, and other significant considerations such as legal and regulatory obligations.

We caution that the foregoing list of risk factors is not exhaustive and other factors could also adversely affect our results. When relying on our forward-looking statements to make decisions with respect to us, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. Material economic assumptions underlying the forward-looking statements contained in this 2021 Annual Report are set out in the Economic, market and regulatory review and outlook section and for each business segment under the Strategic priorities and Outlook headings. Except as required by law, we do not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by us or on our behalf.

Additional information about these and other factors can be found in the risk sections and Impact of COVID-19 pandemic section of this 2021 Annual Report.

Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2021 13

Table of Contents

Overview and outlook
Selected financial and other highlights	Table 1
---	---
(Millions of Canadian dollars, except per share, number of and percentage amounts)	2021			2020		2021 vs. 2020<br> <br>Increase (decrease)
---	---	---	---	---	---	---	---	---	---
Total revenue	$	49,693		$	47,181	$	2,512		5.3%
Provision for credit losses (PCL)		(753	)		4,351		(5,104	)	(117.3)%
Insurance policyholder benefits, claims and acquisition expense (PBCAE)		3,891			3,683		208		5.6%
Non-interest expense		25,924			24,758		1,166		4.7%
Income before income taxes		20,631			14,389		6,242		43.4%
Net income	$	16,050		$	11,437	$	4,613		40.3%
Segments – net income
Personal & Commercial Banking	$	7,847		$	5,087	$	2,760		54.3%
Wealth Management <br>(1)		2,626			2,154		472		21.9%
Insurance		889			831		58		7.0%
Investor & Treasury Services		440			536		(96	)	(17.9)%
Capital Markets		4,187			2,776		1,411		50.8%
Corporate Support <br>(1)		61			53		8		n.m.
Net income	$	16,050		$	11,437	$	4,613		40.3%
Selected information
Earnings per share (EPS) – basic	$	11.08		$	7.84	$	3.24		41.3%
– diluted		11.06			7.82		3.24		41.4%
Return on common equity (ROE) <br>(2<br><br>)		18.6%			14.2%		n.m.		440 bps
Average common equity <br>(2)	$	84,850		$	78,800	$	6,050		7.7%
Net interest margin (NIM) – on average earning assets, net <br>(3<br><br>)		1.48%			1.55%		n.m.		(7) bps
PCL on loans as a % of average net loans and acceptances		(0.10)%			0.63%		n.m.		(73) bps
PCL on performing loans as a % of average net loans and acceptances		(0.20)%			0.39%		n.m.		(59) bps
PCL on impaired loans as a % of average net loans and acceptances		0.10%			0.24%		n.m.		(14) bps
Gross impaired loans (GIL) as a % of loans and acceptances		0.31%			0.47%		n.m.		(16) bps
Liquidity coverage ratio (LCR) <br>(4)		123%			145%		n.m.		(2200) bps
Net stable funding ratio (NSFR) <br>(5)		116%			n.a.		n.a.		n.a.
Capital ratios and Leverage ratio<br><br>(6)
Common Equity Tier 1 (CET1) ratio		13.7%			12.5%		n.m.		120 bps
Tier 1 capital ratio		14.9%			13.5%		n.m.		140 bps
Total capital ratio		16.7%			15.5%		n.m.		120 bps
Leverage ratio		4.9%			4.8%		n.m.		10 bps
Selected balance sheet and other information<br><br>(7)
Total assets	$	1,706,323		$	1,624,548	$	81,775		5.0%
Securities, net of applicable allowance		284,724			275,814		8,910		3.2%
Loans, net of allowance for loan losses		717,575			660,992		56,583		8.6%
Derivative related assets		95,541			113,488		(17,947	)	(15.8)%
Deposits		1,100,831			1,011,885		88,946		8.8%
Common equity		91,983			80,719		11,264		14.0%
Total risk-weighted assets		552,541			546,242		6,299		1.2%
Assets under management (AUM) <br>(3)		1,008,700			843,600		165,100		19.6%
Assets under administration (AUA) <br>(3)<br>, <br>(8)		6,347,300			5,891,200		456,100		7.7%
Common share information
Shares outstanding (000s) – average basic		1,424,343			1,423,915		428		0.0%
– average diluted		1,426,735			1,428,770		(2,035	)	(0.1)%
– end of period		1,424,525			1,422,473		2,052		0.1%
Dividends declared per common share	$	4.32		$	4.29	$	0.03		0.7%
Dividend yield <br>(3)		3.8%			4.7%		n.m.		(90) bps
Dividend payout ratio <br>(3)		39%			55%		n.m.		(1600) bps
Common share price (RY on TSX) <br>(9)	$	128.82		$	93.16	$	35.66		38.3%
Market capitalization (TSX) <br>(9)		183,507			132,518		50,989		38.5%
Business information<br>(number of)
Employees (full-time equivalent) (FTE)		85,301			83,842		1,459		1.7%
Bank branches		1,295			1,329		(34	)	(2.6)%
Automated teller machines (ATMs)		4,378			4,557		(179	)	(3.9)%
Period average US$ equivalent of C$1.00 <br>(10)	$	0.796		$	0.744	$	0.052		7.0%
Period-end US$ equivalent of C$1.00	$	0.808		$	0.751	$	0.057		7.5%
(1)	Effective Q4 2021, gains (losses) on economic hedges of our U.S. share-based compensation plans, which are reflected in revenue, and related variability in share-based compensation expense driven by changes in the fair value of liabilities relating to our U.S. share-based compensation plans have been reclassified from our Wealth Management segment to Corporate Support. Comparative amounts have been reclassified to conform with this presentation.
---	---
(2)	Average amounts are calculated using methods intended to approximate the average of the daily balances for the period. This includes average common equity used in the calculation of ROE. For further details, refer to the Key performance and non-GAAP measures section.
---	---
(3)	See Glossary for composition of this measure.
---	---
(4)	LCR is the average for the three months ended for each respective period and is calculated in accordance with the Office of the Superintendent of Financial Institutions’ (OSFI) Liquidity Adequacy Requirements (LAR) guidance. For further details, refer to the Liquidity and funding risk section.
---	---
(5)	Beginning in Q1 2021, OSFI requires Canadian Domestic Systemically Important Banks (D-SIBs) to disclose the NSFR on a prospective basis. The NSFR is calculated in accordance with OSFI’s Liquidity Adequacy Requirements (LAR) guideline. For further details, refer to the Liquidity and funding risk section.
---	---
(6)	Capital ratios are calculated using OSFI’s Capital Adequacy Requirements (CAR) guideline and the Leverage ratio is calculated using OSFI’s Leverage Requirements (LR) guideline.
---	---
(7)	Represents year-end spot balances.
---	---
(8)	AUA includes $15 billion and $3 billion (2020 – $16 billion and $7 billion) of securitized residential mortgages and credit card loans, respectively.
---	---
(9)	Based on TSX closing market price at period-end.
---	---
(10)	Average amounts are calculated using month-end spot rates for the period.
---	---
n.a.	not applicable
---	---
n.m.	not meaningful
---	---

14 Royal Bank of Canada: Annual Report 2021 Management’s Discussion and Analysis

Table of Contents

About Royal Bank of Canada

Our business segments are described below.

Personal &<br>Commercial Banking	Provides a broad suite of financial products and services in Canada, the Caribbean and the U.S. Our commitment to building and maintaining deep and meaningful relationships with our clients is underscored by the breadth of our product suite, our depth of expertise, and the features of our digital solutions.
Wealth<br>Management	Serves affluent, high net worth (HNW) and ultra-high net worth (UHNW) clients from our offices in key financial centres mainly in Canada, the U.S., the United Kingdom (U.K.), Europe, and Asia. We offer a comprehensive suite of investment, trust, banking, credit and other advice-based solutions. We also provide asset management products to institutional and individual clients through our distribution channels and third-party distributors.
Insurance	Offers a wide range of life, health, home, auto, travel, wealth, annuities, reinsurance advice and solutions, as well as business insurance solutions, to individual, business and group clients.
Investor & Treasury<br>Services	Provides asset servicing, custody, payments and treasury services to financial and other investors worldwide. Trusted with over $4 trillion in assets under administration, and with offices in 16 countries in North America, Europe, the U.K., and Asia-Pacific, our focus is on safeguarding client assets and simplifying our clients’ operations in support of their growth.
Capital Markets	Provides expertise in advisory & origination, sales & trading, and lending & financing to corporations, institutional investors, asset managers, private equity firms and governments globally. We serve clients from 58 offices in 14 countries across North America, the U.K. & Europe, and Australia, Asia & other regions.
Corporate Support	Corporate Support consists of Technology & Operations, which provides the technological and operational foundation required to effectively deliver products and services to our clients, Functions, which includes our finance, human resources, risk management, internal audit and other functional groups, as well as our Corporate Treasury function.
Vision and strategic goals
---

Our business strategies and actions are guided by our vision, “To be among the world’s most trusted and successful financial institutions.” Our three strategic goals are:

•	In Canada, to be the undisputed leader in financial services;
•	In the U.S., to be the preferred partner to corporate, institutional and high net worth clients and their businesses; and
---	---
•	In select global financial centres, to be a leading financial services partner valued for our expertise.
---	---

For our progress in 2021 against our business strategies and strategic goals, refer to the Business segment results section.

Economic, market and regulatory review and outlook – data as at November 30, 2021

The predictions and forecasts in this section are based on information and assumptions from sources we consider reliable. If this information or these assumptions are not accurate, actual economic outcomes may differ materially from the outlook presented in this section.

Economic and market review and outlook

While the global economic recovery has continued, momentum has waned amid ongoing uncertainty regarding the extent and duration of the impacts of the COVID-19 pandemic. Reopening of economies and the significant fiscal and monetary policy stimulus put in place to support the recovery are contributing to stronger GDP growth and improved labour market conditions globally, though this remains uneven. Although increasing vaccination rates are expected to support a continued economic recovery, exceptional government support programs have begun to wind down, and uncertainty remains regarding the emergence and progression of new variants of COVID-19 and the potential impact of vaccine hesitancy. Supply chain disruptions, rising business input costs, and labour shortages are also limiting the pace of further improvement, particularly in goods-producing industries, and adding to rising inflation concerns.

Canada

Canadian GDP is expected to increase by 5.1% in calendar 2021 following a 5.2% contraction in calendar 2020. Activity in high-contact service sectors like restaurants and accommodations improved over the summer as provincial economies reopened, although travel-related industries remain depressed relative to pre-pandemic levels. Output on the goods-producing side of the economy is being constrained by ongoing supply chain disruptions. Consumer price growth has accelerated as the economy

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reopened, and higher business input costs driven by rising demand and supply chain disruptions are threatening further increases at above pre-pandemic rates through calendar 2022. Although the unemployment rate remained above pre-pandemic levels at 6.7% in October, labour markets have improved substantially since the onset of the COVID-19 pandemic and are expected to continue to improve into 2022. While government support programs have begun to wind down, household purchasing power continues to be supported by large amounts of savings. An improved economic growth backdrop and above-target inflation rates are expected to prompt the Bank of Canada (BoC) to begin raising interest rates in calendar 2022. GDP is expected to increase a further 4.3% in calendar 2022. Despite substantial improvement to date, the economy has yet to fully recover from the impacts of the pandemic, particularly in the high-contact and travel service sectors.

U.S.

U.S. GDP is expected to increase 5.5% in calendar 2021 after a 3.4% contraction in calendar 2020. The pace of the economic recovery slowed over the summer amid ongoing supply chain disruptions and the continued spread of COVID-19 in some regions. While employment remains well below pre-pandemic levels, labour markets have continued to improve with the unemployment rate declining to 4.6% in October, down from 6.9% a year earlier. Consumer spending on goods has declined from elevated levels in the spring of 2021 but spending on services has increased as spending rotates away from merchandise and back to leisure and hospitality services that have been in many cases unavailable through the pandemic. Households have accumulated substantial savings, in part due to exceptional government income transfers, to support a further recovery in spending as the virus threat continues to ease. Consumer prices have increased sharply as the economy has re-opened. Higher business input costs and expected further growth in household demand are increasing the risk that inflation growth will persist at rates above pre-pandemic levels for longer than expected. The Federal Reserve (Fed) has committed to maintaining extraordinary policy support until the economic slack is fully absorbed and the labour market has recovered. The Fed is expected to begin the process of raising interest rates in calendar 2022.

Europe

Euro area GDP is expected to rise by 5.2% in calendar 2021 following a 6.5% drop in calendar 2020, amid lifting of most containment measures across member states. Similarly, U.K. GDP is projected to rise by 7.1% in calendar 2021 after a larger 9.7% decline in 2020. Labour market conditions also improved throughout the year, both in the U.K. and Euro area. While labour shortages and supply chain challenges continue to curtail businesses’ abilities to increase production to meet rising demand, leading to inflation concerns, a further economic rebound in both the Euro area and the U.K. is expected in calendar 2022, though likely at a slower pace relative to 2021 in light of these challenges. In the U.K., the Bank of England is expected to begin raising interest rates before the end of calendar 2021, while the European Central Bank (ECB) is expected to hold policy rates through calendar 2022.

Financial markets

Government bond yields remain low but have risen in the latter half of calendar 2021 as the global economic recovery has continued and inflation rates have risen. Equity markets have broadly continued to improve, supported by the positive economic outlook, and prices for some raw materials, including crude oil, have increased to well above pre-pandemic levels reflecting limited supply and rising demand as the virus threat eases globally.

Regulatory environment

For a discussion on risk factors resulting from these and other developments which may affect our business and financial results, refer to the risk sections of this 2021 Annual Report. For further details on our framework and activities to manage risks, refer to the Impact of COVID-19 pandemic, risk and Capital management sections of this 2021 Annual Report.

Defining and measuring success through total shareholder returns

Our focus is to maximize total shareholder returns (TSR) through the achievement of top half performance compared to our global peer group over the medium-term (3-5 years), which we believe reflects a longer-term view of strong and consistent financial performance.

Maximizing TSR is aligned with our three strategic goals discussed earlier and we believe represents the most appropriate measure of shareholder value creation. TSR is a concept used to compare the performance of our common shares over a period of time, reflecting share price appreciation and dividends paid to common shareholders. The absolute size of TSR will vary depending on market conditions, and the bank’s position reflects the market’s perception over a period of time of our overall performance relative to our peers.

Financial performance objectives are used to measure our performance against our medium-term TSR objectives and are used as goals as we execute against our strategic priorities. We review and revise these financial performance objectives as economic, market and regulatory environments change.

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The following table provides a summary of our 3-year and 5-year performance against our medium-term financial performance objectives:

Financial performance compared to our medium-term objectives	Table 2
Medium-term objectives<br> <br>(1)	3-year<br> <br>(2)		5-year<br><br>(2)
---	---	---	---	---
Diluted EPS growth of 7% +		10%		10%
ROE of 16% +		16.5%		16.8%
Strong capital ratio (CET1) <br>(3)		12.8%		12.1%
Dividend payout ratio 40% – 50%		47%		46%
(1)	A medium-term (3-5 year) objective is considered to be achieved when the performance goal is met in either a 3- or 5-year period. These objectives assume a normal business environment and our ability to achieve them in a period may be adversely affected by extraordinary developments such as the COVID-19 pandemic and the current low interest rate environment.
---	---
(2)	Diluted EPS growth is calculated using a Compound Annual Growth Rate (CAGR). ROE, CET1 and dividend payout ratio are calculated using an average.
---	---
(3)	For further details on the CET1 ratio, refer to the Capital management section.
---	---

Our 3-year and 5-year medium-term financial performance objectives will remain unchanged in fiscal 2022.

We compare our TSR to that of a global peer group approved by our Board of Directors (the Board). The global peer group consists of the following 9 financial institutions:

•	Canadian financial institutions:<br> Bank of Montreal, Canadian Imperial Bank of Commerce, Manulife Financial Corporation, National Bank of Canada, The Bank of Nova Scotia, and Toronto-Dominion Bank.
•	U.S. banks:<br> JPMorgan Chase & Co. and Wells Fargo & Company.
---	---
•	International banks:<br>Westpac Banking Corporation.
---	---
Medium-term objectives – 3- and 5-year TSR vs. peer group average	Table 3
---	---
	3-year TSR<br><br>(1)		5-year TSR<br><br>(1)
---	---	---	---	---
Royal Bank of Canada		16%		13%
		Top half		Top half
Peer group average (excluding RBC)		14%		12%
(1)	The 3- and 5-year annualized TSR are calculated based on our common share price appreciation as per the TSX closing market price plus reinvested dividends for the period October 31, 2018 to October 31, 2021 and October 31, 2016 to October 31, 2021.
---	---
Common share and dividend information	Table 4
---	---
For the year ended October 31	2021		2020		2019		2018		2017
---	---	---	---	---	---	---	---	---	---	---
Common share price (RY on TSX) – close, end of period	$	128.82	$	93.16	$	106.24	$	95.92	$	100.87
Dividends paid per share		4.32		4.26		4.00		3.70		3.40
Increase (decrease) in share price		38.3%		(12.3)%		10.8%		(4.9)%		20.4%
Total shareholder return		43.8%		(8.4)%		15.2%		(1.0)%		25.0%
Impact of COVID-19 pandemic
---

On March 11, 2020, the World Health Organization declared the outbreak of a strain of novel coronavirus disease, COVID-19, a global pandemic. The breadth and depth of the impact of the COVID-19 pandemic on the global economy and financial markets has continued to evolve with disruptive effects in countries in which we operate and beyond, while also contributing to increased market volatility and changes to the macroeconomic environment. In addition, the COVID-19 pandemic has continued to affect our employees, clients and communities, with resultant impacts on our operations, financial results and present and future risks to our business.

Measures to contain the spread of COVID-19, including business closures, social distancing protocols, travel restrictions, school closures, quarantines, and restrictions on gatherings and events, have been widespread. These measures have had and continue to have extensive implications for the global economy, including the pace and magnitude of recovery, as well as on related market functions, unemployment rates, inflation, fiscal and monetary policies and supply chains. As the COVID-19 pandemic evolves, including through the emergence and progression of new variants of COVID-19 in different regions, governments continue to adjust their response and approach to the pandemic. While rising vaccination rates have supported a substantial or full easing of containment measures in some regions, progress towards re-opening has been accompanied by resurgences in the spread of COVID-19 and the re-imposition of restrictions in other regions. Consequently, the extent of containment measures and progress towards reopening continues to vary and fluctuate across regions. Despite positive developments, uncertainty remains regarding new variants of COVID-19, the potential impact of vaccine hesitancy, and global vaccine supply and availability, including uneven vaccine access across regions. All of these factors contribute to the uncertainty regarding the timing of a full recovery. Moreover, the COVID-19 pandemic, the containment measures and the phased reopening approach taken in many regions could have longer-term effects on economic and commercial activity and consumer behaviour after the COVID-19 pandemic recedes and containment measures are fully lifted. In conjunction with the COVID-19 pandemic containment measures, governments, regulatory bodies, central banks and private organizations around the globe have provided and continue to provide unprecedented relief programs and temporary measures to facilitate the continued operation of the global economy and financial system, all of which are intended to provide support to individuals and businesses. While some programs and temporary measures have come to an end, others remain in place or have continued to be developed in an effort to support the overall economy. We expect that governments, regulatory bodies, central banks and private organizations will continue to assess the need for these programs and measures.

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For further details on these measures and their impact on us, refer to Impact of pandemic risk factor and Relief program sections outlined below as well as the risk and Capital management sections of this 2021 Annual Report.

In addition to the broad impacts of the COVID-19 pandemic on our employees, clients, communities and operations, the COVID-19 pandemic has impacted and may continue to impact our financial results. Results across all of our business segments have been and continue to be impacted to varying degrees by downstream implications from changes in the macroeconomic environment, including lower interest rates, changes in consumer spending patterns, market volatility, fluctuations in credit spreads, as well as other impacts including changes in credit risk, increased client-driven volumes and changes in operating costs. Notwithstanding these challenges, our financial results and condition amid these challenges demonstrate the resilience of our capital and liquidity positions, which have been bolstered by our position of strength at the time of entering this crisis and throughout fiscal 2020 and 2021.

We are closely monitoring the potential effects and impacts of the COVID-19 pandemic. Given the uncertainty of the extent and duration of the COVID-19 pandemic and its impacts on the economy and society as a whole, as well as the timeline of the transition to a fully reopened economy, the future impact on our businesses and our financial results and condition remains uncertain.

Impact of pandemic risk factor

Pandemics, epidemics or outbreaks of an infectious disease in Canada or worldwide could have an adverse impact on our business, including changes to the way we operate, and on our financial results and condition. The spread of the COVID-19 pandemic, given its severity and scale, has affected and may continue to adversely affect our business and our clients to varying degrees, and also continues to pose risks to the global economy. At the onset of the COVID-19 pandemic, governments and regulatory bodies in affected areas imposed a number of measures designed to contain the COVID-19 pandemic, including widespread business closures, social distancing protocols, travel restrictions, school closures, quarantines, and restrictions on gatherings and events. While rising vaccination rates have supported a substantial or full easing of containment measures in a number of regions, the extent of containment measures and progress towards reopening continues to vary and fluctuate across different regions. As a result, containment measures continue to impact the macroeconomic environment and global economic activity, including the pace and magnitude of recovery. As the impacts of the COVID-19 pandemic continue to evolve, the prolonged effects of the disruption continue to have an impact on our business strategies and initiatives, and could adversely affect our financial results.

Governments, monetary authorities, regulators and financial institutions, including us, have taken and continue to take actions in support of the economy and financial system. These actions include fiscal, monetary and other financial measures to increase liquidity, and provide financial aid to individual, small business, commercial and corporate clients. We expect that these governments, monetary authorities, regulators, and institutions will continue to assess the need for these programs and measures. Additionally, we implemented various temporary relief programs beyond the available government programs to further support our clients in financial need. Although the temporary relief programs have largely concluded, we have assessed and will continue to assess the needs of each individual client and continue to provide support to clients on a case by case basis. For more information on these programs, refer to the Relief programs, Liquidity and funding risk and Capital management sections.

Uncertainty remains as to the full impacts of the COVID-19 pandemic on the global economy, financial markets, and us, including on our financial results, regulatory capital and liquidity ratios and ability to meet regulatory and other requirements. The ultimate impacts will depend on future developments that are highly uncertain and cannot be predicted, including the scope, severity, duration and additional subsequent waves of the COVID-19 pandemic, as well as the effectiveness of actions and measures taken by government, monetary and regulatory authorities and other third parties. Despite positive developments, uncertainty remains regarding new variants of COVID-19, the potential impact of vaccine hesitancy, and global vaccine supply and availability, including uneven vaccine access.

The COVID-19 pandemic has and may continue to result in disruptions to some of our clients and the way in which we conduct our business and could continue to adversely impact our business operations and the quality and continuity of service to clients. We have taken proactive measures through our business continuity plans to adapt to the ongoing work from home arrangements and carefully plan the return to premise for some of our employees, and are maintaining our focus on the well-being of our employees and our ability to serve clients.

In addition to the impact that the COVID-19 pandemic has had and continues to have on our business, it may also continue to increase financial stress, possibly arising from support programs coming to an end, on some of our clients. This, in conjunction with operational constraints due to the impacts of social distancing, could lead to increased pressure on the financial performance of some of our clients, which, to some extent, creates uncertainty around potential future expected credit losses for us.

If the COVID-19 pandemic is further prolonged, including the possibility of additional subsequent waves, or further diseases emerge that give rise to similar effects, the adverse impact on the economy could deepen and could potentially result in volatility and declines in financial markets. Moreover, it remains uncertain how the macroeconomic environment, and societal and business norms will be impacted following the COVID-19 pandemic. Unexpected developments in financial markets, regulatory environments, or consumer behaviour and confidence may also have adverse impacts on our financial results and condition, business operations and reputation, for a substantial period of time.

We are closely monitoring the potential continued effects and impacts of the COVID-19 pandemic, which continues to be an evolving situation.

In virtually all aspects of our operations, our view of risks is not static as our business activities expose us to a wide variety of risks. Consistent with our Enterprise Risk Management Framework (ERMF), we actively manage our risks to help protect and enable our businesses. Additionally, we continue to evaluate the impacts that the COVID-19 pandemic has had and continues to have on our business, including the impact on our top and emerging risks, operational and reputational risks as well as credit, market and liquidity and funding risks. For further details on our Top and emerging and Operational risks, refer to the risk sections in this 2021 Annual Report.

Relief programs

In response to the COVID-19 pandemic, several government programs have been developed to provide financial aid to individuals and businesses, which include wage replacement for individuals, wage subsidies and rent relief for businesses, and lending

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programs for businesses, which we are administering for our clients. To further support our clients in financial need, various temporary relief programs were launched beyond the available government programs.

RBC relief programs

During the second quarter of 2020, we announced the RBC Client Relief program which aimed to provide relief for clients impacted by the COVID-19 pandemic. The RBC Client Relief program for the majority of our commercial and small business clients closed on June 30, 2020 and loan deferrals within the program closed for retail clients on September 30, 2020. Payment deferral periods for clients that participated in these programs largely concluded by the end of the second quarter of 2021, however we have assessed and will continue to assess the needs of each individual client and continue to provide support to clients on a case by case basis.

Government programs in response to the COVID-19 pandemic

Government of Canada

Commencing in the second quarter of 2020, the Department of Finance Canada announced new programs and revisions to existing programs to help support the functioning of markets and finance businesses while ensuring the financial sector remains sound, well-capitalized and resilient, in light of the impact of the COVID-19 pandemic. To support businesses experiencing cash flow challenges during this unprecedented time, the Canadian Federal government established the following significant programs in which Canadian financial institutions are assisting with financial relief:

•	The Canada Emergency Business Account (CEBA) – Under this program, Canadian banks were able to facilitate interest-free loans of up to $60,000 to existing eligible small business clients as a source of liquidity for immediate operating costs. The loans were funded by the Government of Canada, with the Canadian banks retaining no credit risk. The application window for the CEBA program closed on June 30, 2021.
•	Export Development Canada (EDC) Business Credit Availability Program Guarantee – Under this program, Canadian banks are able to provide existing eligible mid-sized and large business clients, focused on both export oriented and domestic sales-based businesses, with loans of up to $6.25 million to support short-term liquidity needs. These loans must be used for certain operating costs and are 80% guaranteed by the EDC. On June 2, 2021, the EDC announced that the application deadline for this program has been extended to December 31, 2021.
---	---
•	Business Development Canada (BDC) Co-Lending Program – Under this program, the BDC and Canadian banks jointly provide loans, which are funded based on an 80%/20% split, respectively, to eligible business clients of up to $6.25 million to meet their operational and liquidity needs. The maximum loan varies by the size of the business and may be structured with an interest-only payment obligation for the first year. On June 2, 2021, the BDC announced that the application deadline for this program has been extended to December 31, 2021.
---	---
•	BDC Mid-Market Financing Program – Under this program, the BDC and Canadian banks provide loans, which are funded based on a 90%/10% split, respectively, to eligible mid-sized business clients ranging between $12.5 million and $60 million to meet their operational and liquidity needs. On June 2, 2021, the BDC announced that the application deadline for this program has been extended to December 31, 2021.
---	---
•	EDC Mid-Market Guarantee and Financing Program – Under this program, Canadian banks are able to provide existing eligible mid-sized and large business clients, focused on both export oriented and domestic sales-based businesses, with loans ranging from $12.5 million to a maximum of $80 million for terms up to 5 years, to support their liquidity needs. These loans must be used for certain operating costs and are 75% guaranteed by the EDC. On June 2, 2021, the EDC announced that the application deadline for this program has been extended to December 31, 2021.
---	---
•	On January 26, 2021, the Canadian Federal government announced the BDC Highly Affected Sectors Credit Availability Program (HASCAP). Under this program, Canadian banks are able to provide low-interest loans ranging from $25,000 to $1 million to businesses that have been heavily impacted by the COVID-19 pandemic to cover operational cash flow needs. Loans funded under this program are fully guaranteed by the BDC. The application deadline for this program has been extended from June 30, 2021 to December 31, 2021.
---	---

As at October 31, 2021, we have facilitated the administration of relief to more than 203,100 clients (July 31, 2021 – 200,900) who have enrolled in the Canadian federal government programs, with corresponding exposures of $12 billion (July 31, 2021 – $12 billion), of which $11 billion (July 31, 2021 – $11 billion) was funded. For further details, refer to Note 6 of our 2021 Annual Consolidated Financial Statements.

U.S. Government

In March 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law, which is in addition to other programs that were enacted by the U.S. Federal Government. As part of the CARES Act, the Paycheck Protection Program (PPP) offers small businesses with loans, guaranteed by the U.S. Federal Government, to support the payment of payroll costs, interest on mortgages, rent, and utilities. Through this program, we have provided loans directly to our clients based on their assessment of certain eligibility requirements and failure to meet these requirements will result in recourse actions for the borrower. In some cases, the U.S. Small Business Administration may forgive all or a portion of the loan.

On June 5, 2020, the Paycheck Protection Program Flexibility Act of 2020 (Flexibility Act) was signed into law, which amends the CARES Act and is intended to provide additional relief from the original terms of the PPP, including but not limited to, the extension of the period available for support payments from 8 to 24 weeks after PPP loan origination, the extension of the maturity of PPP loans granted from two to five years and the modification of eligibility requirements. Applications for the PPP closed on August 8, 2020.

In January 2021, the U.S. Small Business Administration (SBA), in consultation with the U.S. Treasury Department, pursuant to the “Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act” (Economic Aid Act) relaunched the PPP, extending it through March 31, 2021, and announced a number of updates to the PPP for current and future loans. The expanded program includes new categories of eligible expenses, including operating expenditures, property damage costs, supplier costs and worker protection expenditures, in addition to payroll costs, utilities and mortgage interest. Borrowers are also provided with additional flexibility, including the ability to set their covered period for forgivable expenditures to be any length between 8 and 24 weeks. Certain borrowers with existing PPP loans may qualify for a second draw loan and may be eligible for a supplemental increase to their first draw. On March 30, 2021, the “PPP Extension Act” was signed into law, extending the PPP for an additional

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two months to May 31, 2021, and providing an additional 30-day period for the SBA to process pending applications. The application window for the PPP closed on May 31, 2021.

As at October 31, 2021, loans outstanding under the PPP were $2 billion (US$2 billion) (July 31, 2021 – $3 billion, (US$3 billion)) to 10,441 clients (July 31, 2021 – 12,220 clients).

Programs in support of liquidity and funding

Commencing in the second quarter of 2020, governments and federal agencies expanded the eligibility criteria to existing funding programs and announced new programs to provide further liquidity to banks as well as providing additional sources to access funding to support clients during this time of uncertainty. The majority of these measures or programs have been discontinued or are winding down and we expect that governments and federal agencies will continue to assess the need for these programs as the global economy continues to recover from the effects of the COVID-19 pandemic.

For further details on how we are managing our liquidity and funding profile, refer to the Liquidity and funding risk section of this 2021 Annual Report.

Financial performance
Overview
---

2021 vs. 2020

Net income of $16,050 million increased $4,613 million or 40% from last year. Diluted EPS of $11.06 was up $3.24 or 41% and ROE of 18.6% was up 440 bps. Our Common Equity Tier 1 (CET1) ratio was 13.7%, up 120 bps from last year.

Our results reflected higher earnings in Personal & Commercial Banking, Capital Markets, Wealth Management, and Insurance, partially offset by lower earnings in Investor & Treasury Services. The prior year reflected elevated provisions on performing loans due to the impact of the COVID-19 pandemic, which unfavourably impacted results in Personal & Commercial Banking, Capital Markets and Wealth Management, whereas current year results reflect releases of provisions on performing loans primarily driven by improvements in our macroeconomic and credit quality outlook.

For further details on our business segment results and CET1 ratio, refer to the Business segment results and Capital management sections, respectively.

Impact of foreign currency translation

The following table reflects the estimated impact of foreign currency translation on key income statement items:

		Table 5
(Millions of Canadian dollars, except per share amounts)	2021 vs. 2020
Increase (decrease):
Total revenue	$	(977	)
PCL		28
Non-interest expense		(707	)
Income taxes		(50	)
Net income		(248	)
Impact on EPS
Basic	$	(0.17	)
Diluted		(0.17	)

The relevant average exchange rates that impact our business are shown in the following table:

Table 6
(Average foreign currency equivalent of C$1.00) (1)	2021		2020
---	---	---	---	---
U.S. dollar		0.796		0.744
British pound		0.579		0.579
Euro		0.668		0.658
(1)	Average amounts are calculated using month-end spot rates for the period.
---	---

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Total revenue

Table 7
(Millions of Canadian dollars, except percentage amounts)	2021		2020
---	---	---	---	---
Interest and dividend income	$	28,145	$	34,883
Interest expense		8,143		14,048
Net interest income	$	20,002	$	20,835
NIM		1.48%		1.55%
Insurance premiums, investment and fee income	$	5,600	$	5,361
Trading revenue		1,183		1,239
Investment management and custodial fees		7,132		6,101
Mutual fund revenue		4,251		3,712
Securities brokerage commissions		1,538		1,439
Service charges		1,858		1,842
Underwriting and other advisory fees		2,692		2,319
Foreign exchange revenue, other than trading		1,066		1,012
Card service revenue		1,078		969
Credit fees		1,530		1,321
Net gains on investment securities		145		90
Share of profit in joint ventures and associates		130		77
Other		1,488		864
Non-interest income	$	29,691	$	26,346
Total revenue	$	49,693	$	47,181

2021 vs. 2020

Total revenue increased $2,512 million or 5% from last year, largely due to higher investment management and custodial fees, other revenue, mutual fund revenue, and underwriting and other advisory fees. Higher insurance premiums, investment and fee income (Insurance revenue) and credit fees also contributed to the increase. These factors were partially offset by a decrease in net interest income. The impact of foreign exchange translation decreased total revenue by $977 million.

Net interest income decreased $833 million or 4%, largely reflecting lower trading revenue in Capital Markets and the impact of foreign exchange translation. In Canadian Banking and U.S. Wealth Management (including City National), volume growth more than offset the impact of lower spreads.

NIM was down 7 bps compared to last year, largely reflecting lower spreads in U.S. Wealth Management (including City National) driven by the impact of lower interest rates and changes in average earning assets mix, and lower spreads in Canadian Banking primarily due to the impact of lower interest rates and changes in product mix.

Insurance revenue increased $239 million or 4%, mainly reflecting higher group annuity sales as well as business growth, both of which are largely offset in PBCAE. These factors were partially offset by the change in fair value of investments backing policyholder liabilities and the impact of realized investment gains in the prior year.

Investment management and custodial fees increased $1,031 million or 17%, primarily driven by higher average fee-based client assets reflecting market appreciation and net sales, partially offset by the impact of foreign exchange translation.

Mutual fund revenue increased $539 million or 15%, primarily due to higher average fee-based client assets reflecting market appreciation and net sales in Wealth Management, and higher average mutual fund balances driving higher distribution fees in Canadian Banking.

Underwriting and other advisory fees increased $373 million or 16%, mainly due to higher M&A activity and higher equity origination, across most regions.

Credit fees increased $209 million or 16%, primarily driven by higher loan syndication activity across most regions.

Other revenue increased $624 million or 72%, largely attributable to changes in the fair value of the hedges related to our U.S. share-based compensation plans, which was largely offset in Non-interest expense, and the impact of economic hedges.

Additional trading information

Table 8
(Millions of Canadian dollars)	2021		2020
---	---	---	---	---
Net interest income <br>(1)	$	2,623	$	3,459
Non-interest income		1,183		1,239
Total trading revenue	$	3,806	$	4,698
Total trading revenue by product
Interest rate and credit	$	1,948	$	2,838
Equities		1,285		1,234
Foreign exchange and commodities		573		626
Total trading revenue	$	3,806	$	4,698
(1)	Reflects net interest income arising from trading-related positions, including assets and liabilities that are classified or designated at fair value through profit or loss (FVTPL).
---	---

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2021 vs. 2020

Total trading revenue of $3,806 million, which is comprised of trading-related revenue recorded in Net interest income and Non-interest income, decreased $892 million or 19% from last year, mainly reflecting lower fixed income trading across all regions due to spread compression in repo and secured financing products and reduced client activity.

Provision for credit losses

2021 vs. 2020

Total PCL decreased $5,104 million from last year, primarily reflecting elevated provisions on performing loans in the prior year due to the impact of the COVID-19 pandemic and releases in the current year primarily driven by improvements in our macroeconomic and credit quality outlook. The PCL on loans ratio of (10) bps decreased 73 bps.

For further details on PCL, refer to Credit quality performance in the Credit risk section.

Insurance policyholder benefits, claims and acquisition expense (PBCAE)

2021 vs. 2020

PBCAE of $3,891 million increased $208 million or 6% from last year, mainly reflecting higher group annuity sales and business growth, both of which are largely offset in revenue. Lower favourable investment-related experience and a lower impact from reinsurance contract renegotiations also contributed to the increase. These factors were partially offset by the change in fair value of investments backing policyholder liabilities, favourable annual actuarial assumption updates in the current year largely related to mortality and economic assumptions, and lower claims costs mainly in our travel and disability products.

Non-interest<br> expense
Table 9
---
(Millions of Canadian dollars, except percentage amounts)	2021		2020
---	---	---	---	---
Salaries	$	6,724	$	6,758
Variable compensation		7,145		6,040
Benefits and retention compensation		2,053		1,994
Share-based compensation		617		460
Human resources		16,539		15,252
Equipment		1,986		1,907
Occupancy		1,584		1,660
Communications		931		989
Professional fees		1,351		1,330
Amortization of other intangibles		1,287		1,273
Other		2,246		2,347
Non-interest expense	$	25,924	$	24,758
Efficiency ratio<br> <br>(1)		52.2%		52.5%
Efficiency ratio adjusted<br> <br>(2)		52.2%		52.8%
(1)	Efficiency ratio is calculated as Non-interest expense divided by Total revenue.
---	---
(2)	This is a non-GAAP ratio. This measure has been adjusted by excluding the change in fair value of investments backing policyholder liabilities from total revenue. For further details, refer to the Key performance and non-GAAP measures section.
---	---

2021 vs. 2020

Non-interest expense increased $1,166 million or 5% from last year, primarily attributable to higher variable compensation on improved results. Higher staff-related costs and the change in the fair value of our U.S share-based compensation plans, which was largely offset in Other revenue, also contributed to the increase. These factors were partially offset by the impact of foreign exchange translation.

Our efficiency ratio of 52.2% decreased 30 bps from last year. Excluding the change in fair value of investments backing policyholder liabilities, our efficiency ratio of 52.2% decreased 60 bps from last year.

Efficiency ratio excluding the change in fair value of investments backing policyholder liabilities is a non-GAAP ratio. For further details, including a reconciliation, refer to the Key performance and non-GAAP measures section.

22 Royal Bank of Canada: Annual Report 2021 Management’s Discussion and Analysis

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Income and other taxes
Table 10
---
(Millions of Canadian dollars, except percentage amounts)	2021		2020
---	---	---	---	---
Income taxes	$	4,581	$	2,952
Other taxes
Value added and sales taxes		443		496
Payroll taxes		810		771
Capital taxes		73		52
Property taxes		140		140
Insurance premium taxes		31		29
Business taxes		39		43
		1,536		1,531
Total income and other taxes	$	6,117	$	4,483
Income before income taxes	$	20,631	$	14,389
Effective income tax rate		22.2%		20.5%
Effective total tax rate<br> <br>(1)		27.6%		28.2%
(1)	Total income and other taxes as a percentage of income before income taxes and other taxes.
---	---

2021 vs. 2020

Income tax expense increased $1,629 million or 55% from last year, primarily due to higher income before income taxes.

The effective income tax rate of 22.2% increased 170 bps, as the prior year reflected a higher proportion of income from lower tax rate jurisdictions and tax exempt income relative to the decline in earnings experienced last year.

Other taxes increased $5 million from last year, mainly due to higher payroll taxes driven by higher staff-related costs and higher capital taxes, largely offset by lower value added and sales taxes commensurate with reduced purchase activity.

Client assets

Assets under administration

Assets under administration (AUA) are assets administered by us which are beneficially owned by our clients. We provide services that are administrative in nature, including safekeeping, collecting investment income, settling purchase and sale transactions, and record keeping. Underlying investment strategies within AUA are determined by our clients and generally do not impact the administrative fees that we receive. Administrative fees can be impacted by factors such as asset valuation level changes from market movements, types of services administered, transaction volumes, geography and client relationship pricing based on volumes or multiple services.

Our Investor & Treasury Services business is the primary business segment that has AUA with approximately 73% of total AUA, as at October 31, 2021, followed by our Wealth Management and Personal & Commercial Banking businesses with approximately 21% and 6% of total AUA, respectively.

2021 vs. 2020

AUA increased $456 billion or 8% from last year, primarily reflecting market appreciation, partially offset by lower client activity in Investor & Treasury Services and the impact of foreign exchange translation.

The following table summarizes AUA by geography and asset class:

AUA by geographic mix and asset class	Table 11
(Millions of Canadian dollars)	2021		2020
---	---	---	---	---
Canada<br><br>(1)
Money market	$	42,700	$	42,800
Fixed income		772,400		763,500
Equity		781,400		591,200
Multi-asset and other		1,150,400		954,800
Total Canada		2,746,900		2,352,300
U.S.<br><br>(1)
Money market		49,800		40,100
Fixed income		90,400		107,300
Equity		256,000		195,400
Multi-asset and other		324,600		256,000
Total U.S.		720,800		598,800
Other International<br><br>(1)
Money market		32,800		40,700
Fixed income		308,200		375,400
Equity		865,000		837,200
Multi-asset and other		1,673,600		1,686,800
Total International		2,879,600		2,940,100
Total AUA	$	6,347,300	$	5,891,200
(1)	Geographic information is based on the location from where our clients are serviced.
---	---

Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2021 23

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Assets under management

Assets under management (AUM) are assets managed by us which are beneficially owned by our clients. Management fees are paid by the investment funds and other clients for the investment capabilities of an investment manager and can also cover administrative services. Management fees may be calculated daily, monthly or quarterly as a percentage of the AUM, depending on the distribution channel, product and investment strategies. In general, equity strategies carry a higher fee rate than fixed income or money market strategies. Fees are also impacted by asset mix and relationship pricing for clients using multiple services. Higher risk assets generally produce higher fees, while clients using multiple services can take advantage of synergies which reduce the fees they are charged. Certain funds may have performance fee arrangements where fees are recorded when certain benchmarks or performance targets are achieved. These factors could lead to differences in fees earned by product and therefore net return by asset class may vary despite similar average AUM. Our Wealth Management segment is the primary business segment that has AUM with approximately 99% of total AUM as at October 31, 2021.

2021 vs. 2020

AUM increased $165 billion or 20% from last year, primarily due to market appreciation and net sales, partially offset by the impact of foreign exchange translation.

The following table presents the change in AUM for the year ended October 31, 2021:

Client assets – AUM	Table 12
	2021															2020
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
(Millions of Canadian dollars)	Money market			Fixed income			Equity			Multi-asset<br><br>and other			Total			Total
AUM, beginning balance	$	48,900		$	227,600		$	96,000		$	471,100		$	843,600		$	762,300
Institutional inflows		20,200			55,000			12,300			10,500			98,000			106,700
Institutional outflows		(16,300	)		(42,200	)		(6,300	)		(8,900	)		(73,700	)		(80,300	)
Personal flows, net		(2,400	)		3,300			3,500			47,100			51,500			31,600
Total net flows		1,500			16,100			9,500			48,700			75,800			58,000
Market impact		–			(300	)		33,400			90,700			123,800			17,900
Acquisition/dispositions		(4,500	)		–			–			–			(4,500	)		700
Foreign exchange		(2,400	)		(8,000	)		(1,300	)		(18,300	)		(30,000	)		4,700
Total market, acquisition/dispositions and foreign exchange impact		(6,900	)		(8,300	)		32,100			72,400			89,300			23,300
AUM, balance at end of year	$	43,500		$	235,400		$	137,600		$	592,200		$	1,008,700		$	843,600
Business segment results
---
Results by business segments
---
Table 13
---
	2021																					2020
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
(Millions of Canadian dollars,<br>except percentage amounts)		Personal &<br>Commercial<br>Banking			Wealth<br>Management			Insurance			Investor &<br>Treasury<br>Services			Capital<br>Markets<br><br>(1)			Corporate<br>Support<br><br>(1)			Total			Total
Net interest income	$	12,621		$	2,689		$	–		$	460		$	4,553		$	(321	)	$	20,002		$	20,835
Non-interest income		5,725			10,607			5,600			1,704			5,634			421			29,691			26,346
Total revenue		18,346			13,296			5,600			2,164			10,187			100			49,693			47,181
PCL		(187	)		(47	)		(1	)		(8	)		(509	)		(1	)		(753	)		4,351
PBCAE		–			–			3,891			–			–			–			3,891			3,683
Non-interest expense		7,978			9,929			596			1,589			5,427			405			25,924			24,758
Income before income taxes		10,555			3,414			1,114			583			5,269			(304	)		20,631			14,389
Income taxes		2,708			788			225			143			1,082			(365	)		4,581			2,952
Net income	$	7,847		$	2,626		$	889		$	440		$	4,187		$	61		$	16,050		$	11,437
ROE <br>(2)		32.0%			15.9%			37.4%			14.0%			18.3%			n.m.			18.6%			14.2%
Average assets	$	527,100		$	136,000		$	21,600		$	235,400		$	710,200		$	47,900		$	1,678,200		$	1,636,700
(1)	Net interest income, Non-interest income, Total revenue, Income before income taxes, and Income taxes are presented in Capital Markets on a taxable equivalent basis (teb). The teb adjustment is eliminated in the Corporate Support segment. For a further discussion, refer to the How we measure and report our business segments section.
---	---
(2)	For further details, refer to the Key performance and non-GAAP measures section.
---	---
n.m.	not meaningful
---	---

24 Royal Bank of Canada: Annual Report 2021 Management’s Discussion and Analysis

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How we measure and report our business segments

Key methodologies

The following outlines the key methodologies and assumptions used in our management reporting framework. These are periodically reviewed by management to ensure they remain valid.

Expense and tax allocation

To ensure that our business segments’ results include expenses associated with the conduct of their business, we allocate costs incurred or services provided by Technology & Operations and Functions, which are directly undertaken or provided on the business segments’ behalf. For other costs not directly attributable to our business segments, including overhead costs and other indirect expenses, we use our management reporting framework for allocating these costs to each business segment in a manner that is intended to reflect the underlying benefits.

Capital attribution

Our management reporting framework also determines the attribution of capital to our business segments in a manner that is intended to consistently measure and align economic costs with the underlying benefits and risks associated with the activities of each business segment. The amount of capital assigned to each business segment is referred to as attributed capital. Unattributed capital and associated amounts are reported in Corporate Support. For further information, refer to the Capital management section.

Funds transfer pricing

Funds transfer pricing refers to the pricing of intra-company borrowing or lending for management reporting purposes. We employ a funds transfer pricing process to enable risk-adjusted management reporting of segment results. This process determines the costs and revenue for intra-company borrowing and lending of funds after taking into consideration our interest rate risk and liquidity risk management objectives, as well as applicable regulatory requirements.

Provisions for credit losses

PCL is recorded to recognize estimated credit losses on all financial assets, except for financial assets classified or designated as FVTPL and equity securities designated as fair value through other comprehensive income (FVOCI), which are not subject to impairment assessment. For details on our accounting policy on Allowance for credit losses (ACL), refer to Note 2 of our 2021 Annual Consolidated Financial Statements.

PCL is included in the results of each business segment to fully reflect the appropriate expenses related to the conduct of each business segment.

In addition to the key methodologies described above, the following components of our management reporting framework also impact how our business segments are managed and reported:

•	Wealth Management results include disclosure in U.S. dollars, primarily for U.S. Wealth Management (including City National) as we review and manage the results of this business largely in this currency.
•	Capital Markets results are reported on a teb basis, which grosses up total revenue from certain tax-advantaged sources (Canadian taxable corporate dividends and the U.S. tax credit investment business) to their effective taxable equivalent value with a corresponding offset recorded in the provision for income taxes. We record the elimination of the teb adjustments in Corporate Support. We believe these adjustments are useful and reflect how Capital Markets manages its business, since it enhances the comparability of revenue and related ratios across taxable revenue and our principal tax-advantaged sources of revenue. The use of teb adjustments and measures may not be comparable to similar GAAP measures or similarly adjusted amounts disclosed by other financial institutions.
---	---
•	Corporate Support results include all enterprise level activities that are undertaken for the benefit of the organization that are not allocated to our five business segments, such as certain treasury and liquidity management activities, including amounts associated with unattributed capital, and consolidation adjustments, including the elimination of the teb gross-up amounts. In addition, we record gains (losses) on economic hedges of our U.S. Wealth Management (including City National) share-based compensation plans, which are reflected in revenue, and related variability in share-based compensation expense driven by changes in the fair value of liabilities relating to these plans in Corporate Support as we believe this presentation more closely aligns with how we view business performance and manage the underlying risks.
---	---

Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2021 25

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Key performance and non-GAAP measures

Performance measures

We measure and evaluate the performance of our consolidated operations and each business segment using a number of financial metrics, such as net income and ROE. Certain financial metrics, including ROE, do not have a standardized meaning under generally accepted accounting principles (GAAP) and may not be comparable to similar measures disclosed by other financial institutions.

Return on common equity

We use ROE, at both the consolidated and business segment levels, as a measure of return on total capital invested in our business. Management views the business segment ROE measure as a useful measure for supporting investment and resource allocation decisions because it adjusts for certain items that may affect comparability between business segments and certain competitors.

Our consolidated ROE calculation is based on net income available to common shareholders divided by total average common equity for the period. Business segment ROE calculations are based on net income available to common shareholders divided by average attributed capital for the period. For each segment, average attributed capital includes the capital required to underpin various risks as described in the Capital management section and amounts invested in goodwill and intangibles.

The attribution of capital involves the use of assumptions, judgments and methodologies that are regularly reviewed and revised by management as deemed necessary. Changes to such assumptions, judgments and methodologies can have a material effect on the business segment ROE information that we report. Other companies that disclose information on similar attributions and related return measures may use different assumptions, judgments and methodologies.

Calculation of ROE	Table 14
	2021
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
(Millions of Canadian dollars,<br>except percentage amounts)	Personal &<br>Commercial<br>Banking		Wealth<br>Management		Insurance		Investor &<br>Treasury<br>Services		Capital<br>Markets		Corporate<br>Support		Total
Net income available to common shareholders	$	7,761	$	2,577	$	882	$	431	$	4,119	$	11		15,781	$ 11,164
Total average common equity <br>(1)<br>, <br>(2)		24,200		16,200		2,350		3,100		22,550		16,450		84,850	78,800
ROE <br>(3)		32.0%		15.9%		37.4%		14.0%		18.3%		n.m.		18.6%	14.2%

All values are in US Dollars.

(1)	Total average common equity represents rounded figures.
(2)	The amounts for the segments are referred to as attributed capital.
---	---
(3)	ROE is based on actual balances of average common equity before rounding.
---	---
n.m.	not meaningful
---	---

Non-GAAP measures

We believe that certain non-GAAP measures described below are more reflective of our ongoing operating results and provide readers with a better understanding of management’s perspective on our performance. These measures also enhance the comparability of our financial performance for the year ended October 31, 2021 with the results from last year. Non-GAAP measures (including non-GAAP ratios) do not have a standardized meaning under GAAP and may not be comparable to similar measures disclosed by other financial institutions.

The following discussion describes the non-GAAP measures we use in evaluating our operating results.

Adjusted efficiency ratio

Our efficiency ratio is impacted by the change in fair value of investments backing policyholder liabilities, which is reported in revenue and largely offset in PBCAE. The adjusted efficiency ratio is a non-GAAP ratio and is calculated using adjusted total revenue, which is a non-GAAP measure as it excludes the impact from the change in fair value of investments backing policyholder liabilities. We believe the adjusted efficiency ratio is a useful measure as changes in the fair value of investments backing policyholder liabilities can lead to volatility in total revenue that could obscure trends in underlying business performance and reduce comparability with prior periods.

Consolidated <br>non-GAAP<br> efficiency ratio	Table 15
	2021						2020
---	---	---	---	---	---	---	---	---	---	---	---	---	---
			Item excluded						Item excluded
(Millions of Canadian dollars,<br>except percentage amounts)	As reported		Change in fair value<br>of investments backing<br>policyholder liabilities		Adjusted		As reported		Change in fair value<br>of investments backing<br>policyholder liabilities			Adjusted
Total revenue	$	49,693	$	13	$	49,706	$	47,181	$	(277	)	$	46,904
Non-interest expense		25,924		–		25,924		24,758		–			24,758
Efficiency ratio		52.2%				52.2%		52.5%					52.8%

26 Royal Bank of Canada: Annual Report 2021 Management’s Discussion and Analysis

Table of Contents

Personal & Commercial Banking

Personal & Commercial Banking provides a broad suite of financial products and services to individuals and businesses for their day-to-day banking, investing and financing needs. We are focused on building deep and meaningful relationships with our clients, underscored by our exceptional client experience, the breadth of our product suite, our depth of expertise, and the features of our digital solutions.

> 14 million	8 million	36,675
Number of clients	Active digital users in Canada<br>1	Employees
Revenue by business lines	We operate through two businesses – Canadian Banking and Caribbean & U.S. Banking. Canadian Banking serves our home market in Canada, where we maintain top (#1 or #2) rankings in market share for all key retail and business products. We have the largest branch network, the most ATMs and one of the largest mobile sales forces across Canada. In Caribbean & U.S. Banking, we offer a broad range of financial products and services in targeted markets.<br> <br><br> <br>In Canada, we compete with other Schedule 1 banks, independent trust companies, foreign banks, credit unions, caisses populaires, and auto financing companies.<br> <br><br> <br>In the Caribbean, our competition includes banks, trust companies and investment management companies serving retail and corporate clients, as well as public institutions. In the U.S., we compete primarily with other Canadian banking institutions that have U.S. operations.

2021 Operating environment

›	While impacts from the COVID-19 pandemic continued to persist, client activity improved driving strong volume and fee-based revenue growth throughout fiscal 2021 as economies re-opened due to progress on vaccination distribution, reduced containment measures and continued government support. Further, as businesses began re-opening, unemployment rates also improved.
›	Improvements in the credit environment, driven by the economic recovery from the COVID-19 pandemic, led to favourable changes in our macroeconomic and credit quality outlook, resulting in releases of provisions on performing assets. Lower provisions on impaired loans in our Canadian Banking retail portfolios also reflected the economic recovery underway and the continued impact of the COVID-19 related government support programs.
---	---
›	Personal and business deposits continued to see significant growth throughout fiscal 2021, reflecting clients’ preference for the safety of higher cash balances amidst the COVID-19 pandemic.
---	---
›	Housing activity was strong with record levels of mortgage originations in fiscal 2021. Despite the industry-wide tightening of mortgage lending criteria in the third quarter, low interest rates and demand for housing continued to support strong growth in residential mortgages.
---	---
›	Throughout fiscal 2021, we saw favourable market conditions resulting in solid growth in mutual fund balances from a combination of market appreciation and strong net sales. We also saw significant market activity in the first half of the fiscal year which benefitted our Direct Investing business. While market activity moderated in the second half of the fiscal year, average trading volumes remained above pre-pandemic levels.
---	---
›	The ongoing low interest rate environment continued to be a headwind in fiscal 2021, resulting in a further decline in NIM. NIM was also negatively impacted by changes in product mix and competitive pricing pressures.
---	---
›	Client preferences for digital offerings continue to evolve and this shift has been accelerated due to the impact of the COVID-19 pandemic. We continued to invest in digital solutions to improve the client experience and deliver personalized advice.
---	---
›	Our Caribbean Banking business continued to be negatively impacted by the ongoing low interest rate environment; however, we also saw releases of provisions on performing assets. We also closed the sale of our Eastern Caribbean operations in the second quarter of 2021.
---	---
›	In the U.S., earnings were unfavourably impacted by the low interest rate environment and severe limitations on cross-border travel, as a result of the COVID-19 pandemic.
---	---
1	Represents 90-day active clients
---	---

Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2021 27

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Strategic priorities

OUR STRATEGY	PROGRESS IN 2021	PRIORITIES IN 2022
Transform how we serve our clients	Enabled the expedited digital processing of nearly 200,000 small business loans under the CEBA program since inception of the program<br> <br><br> <br>Opened new format branches to address the needs of specific client segments including students and newcomers to Canada<br> <br><br> <br>Introduced RBC Vantage<br>TM<br> that allows clients to unlock rewards, savings, insights and more with any eligible bank account	Provide flexibility by continuing to deliver anytime, anywhere solutions to our clients across all channels, seamlessly integrating mobile and digital services into our clients’ lives<br> <br><br> <br>Continue to reimagine our branch network to meet the evolving needs of our clients
Accelerate our growth	Continued to provide personalized advice and valued banking solutions to our clients<br> <br><br> <br>Maintained our focus on key high-growth and high-value segments such as retirees, youth, newcomers, business owners, high net worth clients, and healthcare professionals<br> <br><br> <br>Continued to further our partnerships, including helping our clients realize over $90 million in fuel savings with Petro Canada, a Suncor business<br> <br><br> <br>Partnered with DoorDash to bring eligible RBC credit cardholders additional value through savings and special offers<br> <br><br> <br>Established a new partnership with GrantMatch, leveraging its Funding Assessment & Strategy Tool to make it easy for business owners to pursue government funding that matches their business needs<br> <br><br> <br>Launched the RBC ESG Market-Linked GIC which allows investors to support a global portfolio of companies that follow a set of rigorous ESG standards<br> <br><br> <br>Offered Responsible Investing Portfolios through RBC InvestEase<br>®<br>, which are built with a focus on companies that score highest on a wide range of ESG factors, including carbon emissions, product safety and quality, and business ethics	Focus on engaging key high-growth client segments and enabling our advisors to build new and deeper relationships and achieve industry-leading volume growth<br> <br><br> <br>Establish key partnerships to continue to add value for our clients<br> <br><br> <br>Build a suite of <br>best-in-class<br> value propositions, digital experiences and Beyond Banking ventures<br> <br><br> <br>Continue to invest in RBC Ventures by working to scale Ventures and accelerate client acquisition
Rapidly deliver digital solutions to our clients	Continued to deliver leading digital capabilities and functionalities through our award-winning RBC mobile app<br> <br><br> <br>Enhanced our Direct Investing client experience by launching a customizable, <br>web-based<br> Trading Dashboard, free for all clients<br> <br><br> <br>Introduced NOMI<br>®<br> Forecast, the latest capability in our award-winning NOMI<br>®<br> offering, which gives clients a view into their future cash flow by forecasting upcoming preauthorized payment withdrawals from their deposit account<br> <br><br> <br>Continued to expand the capabilities of MyAdvisor<br>®<br>, an online advice platform that digitally connects our clients to an advisor, resulting in over 2.8 million clients activating their personalized investment plans since its launch in 2017<br> <br><br> <br>Launched RBCx<br>TM<br>, a full-service platform designed to provide our business clients with access to capital solutions, innovative products and services, and operational expertise to help technology companies scale<br> <br><br> <br>Expanded RBC Insight Edge<br>TM<br>, our Beyond Banking solution, to provide direct access through a subscription to small and medium retail business and commercial clients<br> <br><br> <br>Launched an integrated accounts payable solution for business clients through RBC PayEdge<br>TM<br>, which helped us earn the 2021 Celent Model Bank Award for Payments Transformation<br> <br><br> <br>Launched a new way for Canadians to pay for their purchases through PayPlan which offers clients a transparent and convenient pay-over-time solution for big-ticket purchases at participating retailers and merchants throughout Canada	Deliver more personalized insights to improve the client experience while continuing to simplify and digitize everyday banking<br> <br><br> <br>Enhance the digital experience for our small business and commercial clients and make it easier for them to transact with us<br> <br><br> <br>Lead in mobile capabilities, enable fulfillment of servicing through digital channels, and move towards a higher degree of agile delivery to transform <br>end-to-end<br> client experience
Innovate to become a more agile and efficient bank	Continued to invest in solutions that simplify, digitize and automate experiences for clients and employees, and enable employees to deliver relevant and expert advice<br> <br><br> <br>Continued to help small businesses thrive by simplifying and automating business formation and everyday legal work with Ownr<br>®<br>, Canada’s leading business and legal management platform	Invest in new tools and capabilities and proactively seek ways to simplify and streamline both our internal processes and the end to end client experience at an accelerated speed
In the Caribbean	Continued transforming the business and overall client experience while driving profitability, simplifying operations, and strategically navigating the <br>COVID-19<br> pandemic and its continued impact on our clients and employees<br> <br><br> <br>Successfully executed Eastern Caribbean divestiture which included the sale of 11 branches in 7 countries. This transaction aligns our investments and resources into markets where our vision can be executed more successfully	Remain focused on becoming the premier digitally-enabled relationship bank by transforming the client experience through automation, digitization and process simplification, and enabling our employees for success
In the U.S.	Despite travel restrictions associated with the <br>COVID-19<br> pandemic, continued to attract new clients and drive record real estate lending<br> <br><br> <br>Made focused investments in digital capabilities to improve productivity, offer a more digitally-enabled client experience, and enhance small business services to support Canadian businesses needing U.S. payment and collection services	Drive accelerated cross-border client growth leading with real estate financing tailored specifically for Canadians, offering advice, tools and resources, value offers and discounts, and access to cross-border experts to guide clients through the full life cycle of owning U.S. property<br> <br><br> <br>Ongoing digitization of <br>end-to-end<br> processes and controls to enhance client self-serve capabilities and improve operational scalability

28 Royal Bank of Canada: Annual Report 2021 Management’s Discussion and Analysis

Table of Contents

Outlook

While uncertainty remains regarding the COVID-19 pandemic, we expect the global economic recovery to continue in 2022, though this could vary or be uneven across different regions. The BoC and other central banks are expected to begin raising interest rates in fiscal 2022. Ongoing inflationary pressures also have the potential to impact our results in fiscal 2022. We will continue to pursue industry-leading volume growth, operational efficiency efforts and channel transformation to achieve our vision of being a digitally-enabled relationship bank.

In the Caribbean, an economic recovery is expected as travel and tourism continue to improve, supported by rising vaccination rates. Continued fiscal stimulus and accommodative monetary conditions in some countries are expected to bolster consumer spending and unemployment relief. We will continue to focus on growth strategies in our target markets, improving operational efficiency, and adding value for our clients.

For further details on our general economic review and outlook, refer to the Economic, market and regulatory review and outlook section.

Personal & Commercial Banking	Table 16
(Millions of Canadian dollars, except percentage amounts and as otherwise noted)	2021			2020
---	---	---	---	---	---
Net interest income	$	12,621		$	12,568
Non-interest income		5,725			5,163
Total revenue		18,346			17,731
PCL on performing assets		(909	)		1,818
PCL on impaired assets		722			1,073
PCL		(187	)		2,891
Non-interest expense		7,978			7,946
Income before income taxes		10,555			6,894
Net income	$	7,847		$	5,087
Revenue by business
Canadian Banking	$	17,570		$	16,838
Personal Banking		13,337			12,703
Business Banking		4,233			4,135
Caribbean & U.S. Banking		776			893
Key ratios
ROE		32.0%			21.7%
NIM		2.51%			2.67%
Efficiency ratio		43.5%			44.8%
Operating leverage <br>(1)		3.1%			(3.1)%
Selected balance sheet information
Average total assets	$	527,100		$	494,600
Average total earning assets, net		502,000			470,200
Average loans and acceptances, net		505,600			473,400
Average deposits		504,300			447,300
Other information
AUA <br>(2), (3)	$	367,700		$	292,800
Average AUA		340,800			287,600
AUM <br>(3)		5,400			5,300
Number of employees (FTE)		36,675			35,964
Credit information
PCL on impaired loans as a % of average net loans and acceptances		0.14%			0.23%
Other selected information – Canadian Banking
Net income	$	7,620		$	5,077
NIM		2.50%			2.64%
Efficiency ratio		42.0%			43.2%
Operating leverage		2.9%			(3.3)%
(1)	See Glossary for composition of this measure.
---	---
(2)	AUA includes securitized residential mortgages and credit card loans as at October 31, 2021 of $15 billion and $3 billion, respectively (October 31, 2020 – $16 billion and $7 billion).
---	---
(3)	Represents year-end spot balances.
---	---

Financial performance

2021 vs. 2020

Net income increased $2,760 million or 54% from last year, primarily attributable to lower PCL. Average volume growth of 10% in Canadian Banking and higher non-interest income also contributed to the increase. These factors were partially offset by lower spreads.

Total revenue increased $615 million or 3%, largely due to average volume growth in Canadian Banking of 7% in loans and 13% in deposits, and higher average mutual fund balances driving higher distribution fees. Increased client activity also contributed to higher card service revenue, securities brokerage commissions and foreign exchange revenue. These factors were partially offset by lower spreads.

NIM decreased 16 bps, primarily due to the impact of lower interest rates and changes in product mix.

PCL decreased $3,078 million, as last year reflected elevated provisions on performing loans due to the impact of the COVID-19 pandemic as compared to releases in the current year primarily driven by improvements in our macroeconomic and credit quality outlook. Lower provisions on impaired loans in our Canadian Banking retail portfolios also contributed to the decrease, resulting in a decrease of 9 bps in the PCL on impaired loans ratio. For further details, refer to Credit quality performance in the Credit risk section.

Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2021 29

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Non-interest expense increased $32 million, largely due to higher staff-related costs, partially offset by the prior year impact of additional compensation for certain employees, primarily those client facing amidst the COVID-19 pandemic, and lower other operating costs.

Average loans and acceptances increased $32 billion or 7%, driven by growth in residential mortgages.

Average deposits increased $57 billion or 13%, reflecting growth in business and personal deposits.

Business line review

In Canada, we operate through two business lines: Personal Banking and Business Banking.

Personal Banking

Personal Banking offers a full range of products focused on meeting the needs of our individual Canadian clients at every stage of their lives through a wide range of financing and investment products and services. This includes home equity financing, personal lending, chequing and savings accounts, private banking, indirect lending (including auto financing), mutual funds and self-directed brokerage accounts, Guaranteed Investment Certificates (GICs), credit cards, and payment products and solutions.

We rank #1 or #2 in market share for all key Personal Banking products in Canada and our retail banking network is the largest in Canada with 1,182 branches and 4,032 ATMs.

Financial performance

Total revenue increased $634 million or 5% compared to last year, largely reflecting average volume growth of 8% and higher average mutual fund balances of 17% driving higher distribution fees. Increased client activity also contributed to higher card service revenue, securities brokerage commissions and foreign exchange revenue. These factors were partially offset by lower spreads driven by the ongoing impact of the low interest rate environment and changes in product mix.

Average residential mortgages increased 12% compared to last year, largely driven by strong housing activity driving record mortgage originations, partially offset by higher mortgage prepayment activity.

Average deposits increased 9% from last year, largely driven by clients’ preference for the safety of higher cash balances amidst the COVID-19 pandemic.

Selected highlights	Table 17
(Millions of Canadian dollars, except number of)	2021		2020
---	---	---	---	---
Total revenue	$	13,337	$	12,703
Other information
Average residential mortgages		305,400		273,200
Average other loans and acceptances, net		74,800		77,800
Average deposits		270,500		248,100
Average credit card balances		16,600		18,100
Credit card purchase volumes		132,400		118,100
Branch mutual fund balances <br>(1)		205,500		166,000
Average branch mutual fund balances		191,300		163,600
AUA – Self-directed brokerage <br>(1)		135,900		96,400
Number as at October 31:
Branches		1,182		1,201
ATMs		4,032		4,182
(1)	Represents year-end spot balances.
---	---

30 Royal Bank of Canada: Annual Report 2021 Management’s Discussion and Analysis

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Business Banking

Business Banking offers a wide range of lending, leasing, deposit, investment, foreign exchange, cash management, auto dealer financing, trade products, and services to small and medium-sized commercial businesses across Canada. With one of the largest teams of relationship managers and specialists in the industry, our commitment to client experience and trusted advice has earned us leading market share in business lending and deposits.

Financial performance

Total revenue increased $98 million or 2% compared to last year, largely due to average volume growth of 14% and higher credit fees reflecting increased client activity. These factors were partially offset by lower spreads, primarily driven by the impact of lower interest rates.

Average loans and acceptances increased 5%, due to the deepening of our existing client relationships.

Average deposits increased 19% from last year, mainly reflecting higher liquidity maintained by our clients amidst the COVID-19 pandemic.

Selected highlights	Table 18
(Millions of Canadian dollars)	2021		2020
---	---	---	---	---
Total revenue	$	4,233	$	4,135
Other information (average)
Loans and acceptances, net		99,800		94,600
Deposits		215,200		180,800

Caribbean & U.S. Banking

Our Caribbean Banking business offers a comprehensive suite of banking products and services, as well as international financing and trade promotion services through extensive branch, ATM, online, and mobile banking networks.

Our U.S. Banking business serves the needs of our Canadian retail and small business clients through banking solutions which help to enable a cross-border lifestyle in the U.S. across all 50 states.

Financial performance

Total revenue was down $117 million or 13% from last year, primarily due to lower spreads and the impact of foreign exchange translation. Reduced revenue due to the sale of our Eastern Caribbean operations also contributed to the decrease.

Average loans and acceptances decreased 6% primarily due to the impact of foreign exchange translation.

Average deposits increased 2%.

Selected highlights	Table 19
(Millions of Canadian dollars,<br> <br>except number of and percentage amounts)	2021		2020
---	---	---	---	---
Total revenue	$	776	$	893
Other information
NIM		2.85%		3.46%
Average loans and acceptances, net		9,100		9,700
Average deposits		18,700		18,400
AUA <br>(1)		5,700		5,900
Average AUA		5,700		6,400
AUM <br>(1)		5,100		5,200
Number as at October 31:
Branches		38		51
ATMs		271		298
(1)	Represents <br>year-end<br> spot balances.
---	---

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Wealth Management

Wealth Management is a global business serving clients in key financial centres. We serve HNW and UHNW individual and institutional clients with a comprehensive suite of advice-based solutions and strategies to help them achieve their financial goals.

$13.3 billion	> 5,500	> $53 billion	> $75 billion
Total revenue	Client-facing advisors	AUA net flows	AUM net flows
Assets under Administration (AUA)<br> <br><br> <br><br> <br>	Assets under Management (AUM)<br> <br><br> <br>	Our lines of business include Canadian Wealth Management, U.S. Wealth Management (including City National), Global Asset Management (GAM), and International Wealth Management.<br> <br><br> <br>• Canadian Wealth Management is the largest full-service wealth advisory business in Canada, as measured by AUA, serving HNW and UHNW clients<br> <br>• U.S. Wealth Management (including City National) also encompasses our private client group (PCG) and clearing and custody (C&C) businesses. PCG is the 7<br>th<br> largest full-service wealth advisory firm in the U.S., as measured by number of advisors, and City National is a premier U.S. private and commercial bank serving HNW, UHNW and commercial clients<br> <br>• GAM is the largest retail fund company in Canada as measured by AUM, as well as a leading institutional asset manager<br> <br>• International Wealth Management serves HNW and UHNW clients, primarily through key financial centres in the U.K., Channel Islands and Asia
---	---	---

2021 Operating environment

›	Earnings in the current fiscal year benefitted from a strong rebound in equity markets, which reached record highs after a sharp decline in the prior fiscal year due to global impacts from the COVID-19 pandemic, while the ongoing low interest rate environment unfavorably impacted our earnings throughout fiscal 2021.
›	Our core businesses performed well with continued volume growth in City National, strong sales in GAM, as well as strong inflows of fee-generating client assets in our wealth advisory businesses reflecting the strength of our business driven by the quality of our advice, the breadth of our investment and holistic wealth planning solutions and clients’ trust in our brand.
---	---
›	We continued to invest in our people and technology to maintain our competitive advantage and increase efficiencies in an environment characterized by market volatility, rapidly changing client preferences and increasing regulatory requirements.
---	---
›	Improvements in the credit environment, driven by the economic recovery from the COVID-19 pandemic, led to favourable changes in our macroeconomic and credit quality outlook, resulting in releases of provisions on performing assets and lower provisions on impaired loans.
---	---

32 Royal Bank of Canada: Annual Report 2021 Management’s Discussion and Analysis

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Strategic priorities

OUR STRATEGY	PROGRESS IN 2021	PRIORITIES IN 2022
In Canada, be the premier service provider for HNW and UHNW clients	Further extended our position as industry leader in our full-service private wealth business<br> <br><br> <br>Continued to focus on holistic wealth planning, including advisor training on intergenerational and business wealth transfer<br> <br><br> <br>Continued to expand RBC<br>®<br> Premier Banking to deepen banking relationships with Wealth Management clients<br> <br><br> <br>Enhanced our digital and data capabilities to drive increased client satisfaction and advisor productivity, including the integration of Wealth Management Online with the RBC Mobile app	Continue to retain and attract top-performing and new advisors to strengthen our talent advantage<br> <br><br> <br>Deliver a differentiated client experience through enriched advisor-client interactions and seamless digital experiences<br> <br><br> <br>Broaden and deepen client relationships by leveraging combined strengths across our other business segments<br> <br><br> <br>Continue to invest in digital solutions to streamline and simplify the business and improve efficiency and advisor productivity<br> <br><br> <br>Renew legacy infrastructure to ensure ongoing resiliency in our technology platforms
In the U.S., become the leading private and commercial bank and wealth manager in our key markets	Invested in key areas needed to grow our U.S. Wealth Management business, including substantial financial advisor recruitment, solid execution on our technology transformation and provided proactive liquidity to our clients via a revamped securities-based lending platform<br> <br><br> <br>In City National, we continued to focus on our core high-growth banking businesses, bolstered our footprint in the entertainment industry, expanded our digital capabilities, and invested in productivity and efficiency programs	Continue to deliver an exceptional client experience for targeted HNW, UHNW, middle market, and business banking segments<br> <br><br> <br>Leverage the combined strengths within U.S. Wealth Management (including City National) and Capital Markets with a view to further accelerate growth in the U.S.<br> <br><br> <br>Further build out our personal banking business through new client acquisition strategies, diverse lending programs, and mortgage-led growth
In select global financial centres, become the most trusted regional private bank	Continued to deliver on successful growth initiatives, bringing the full strength and breadth of RBC to our clients<br> <br><br> <br>Focused on delivering a differentiated client experience by leveraging our global capabilities<br> <br><br> <br>In Asia, made significant progress in execution of our strategy, reflected by strong growth in AUA and AUM	Focus on growing market share in target markets<br> <br><br> <br>Continue to leverage our global strengths to better serve clients<br> <br><br> <br>Continue to deliver an exceptional client experience<br> <br><br> <br>Continue to increase business effectiveness and talent capabilities<br> <br><br> <br>Focus on growing the business in Asia by attracting new advisors, enhancing digital capabilities, expanding the product suite, and deepening cross–business collaboration
In asset management, be a leading, diversified asset manager focused on global institutional and North American retail clients	Maintained #1 market share in Canadian mutual fund AUM<br> <br><br> <br>RBC<br>®<br> iShares strategic alliance maintained #1 market share in Canadian ETFs and continued to accelerate sales growth<br> <br><br> <br>Published RBC GAM’s first annual Task Force on Climate-related Financial Disclosures (TCFD) report	Continue to expand our investment capabilities to meet evolving client needs in our target distribution regions<br> <br><br> <br>Continue shift to a more unified asset management operating model to take better advantage of enterprise and GAM global scale, resources and infrastructure

Outlook

We believe our diversified businesses are well-positioned to continue growing our leading position in Canada and increasing our market share in the HNW and UHNW client segments globally, leveraging the strength of our brand, reputation and solid financial position. Our strategy remains unchanged as we continue to focus on delivering an unmatched client experience through holistic goals-based advice, attracting and retaining top-performing advisors, and collaborating across the enterprise to bring our full breadth of capabilities to our clients. We will continue to invest in our people and technology to improve client and advisor experiences, drive operational efficiencies, and further strengthen our risk, compliance and controls infrastructure to meet heightened regulatory requirements.

For further details on our general economic review and outlook, refer to the Economic, market and regulatory review and outlook section.

Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2021 33

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Wealth Management	Table 20
(Millions of Canadian dollars, except number of, percentage amounts and as otherwise noted)			2020
---	---	---	---	---
Net interest income	2,689		$	2,860
Non-interest income (1)	10,607			9,270
Total revenue (1)	13,296			12,130
PCL on performing assets	(33	)		157
PCL on impaired assets	(14	)		57
PCL	(47	)		214
Non-interest expense (1)	9,929			9,123
Income before income taxes (1)	3,414			2,793
Net income (1)	2,626		$	2,154
Revenue by business
Canadian Wealth Management	3,908		$	3,319
U.S. Wealth Management (including City National) (1)	6,320			6,116
U.S. Wealth Management (including City National) (US millions) (1)	5,035			4,553
Global Asset Management	2,726			2,308
International Wealth Management	342			387
Key ratios
ROE	15.9%			13.1%
NIM	2.25%			2.79%
Pre-tax margin (1), (2)	25.7%			23.0%
Selected balance sheet information
Average total assets	136,000		$	119,500
Average total earning assets, net	119,500			102,600
Average loans and acceptances, net	84,000			76,700
Average deposits	143,000			122,000
Other information
AUA (3), (4)	1,322,300		$	1,100,000
AUM (3)	1,000,600			836,400
Average AUA	1,242,400			1,082,000
Average AUM	937,200			801,500
PCL on impaired loans as a % of average net loans and acceptances	(0.02)%			0.07%
Number of employees (FTE)	19,486			18,978
Number of advisors (5)	5,548			5,428
Estimated impact of U.S. dollar, British pound and Euro translation on key income statement items
(Millions of Canadian dollars, except percentage amounts)	2021 vs. 2020
Increase (decrease):
Total revenue	(468	)
PCL	3
Non-interest expense	(390	)
Net income	(66	)
Percentage change in average U.S. dollar equivalent of C1.00	7%
Percentage change in average British pound equivalent of C1.00	–
Percentage change in average Euro equivalent of C1.00	2%

All values are in US Dollars.

(1)	Effective Q4 2021, gains (losses) on economic hedges of our U.S. share-based compensation plans, which are reflected in revenue, and related variability in share-based compensation expense driven by changes in the fair value of liabilities relating to our U.S. share-based compensation plans have been reclassified from our Wealth Management segment to Corporate Support. Comparative amounts have been reclassified to conform with this presentation.
(2)	Pre-tax margin is defined as Income before income taxes divided by Total revenue.
---	---
(3)	Represents year-end spot balances.
---	---
(4)	In addition to Canadian Wealth Management, U.S. Wealth Management (including City National), and International Wealth Management, AUA includes $7,100 million (2020: $6,100 million) related to GAM.
---	---
(5)	Represents client-facing advisors across all our wealth management businesses.
---	---
Client assets – AUA	Table 21
---	---
(Millions of Canadian dollars)	2021			2020
---	---	---	---	---	---	---
AUA, beginning balance	$	1,100,000		$	1,062,200
Asset inflows		352,800			356,800
Asset outflows		(299,200	)		(345,400	)
Total net flows		53,600			11,400
Market impact		235,900			17,500
Acquisitions/dispositions		(12,100	)		–
Foreign exchange		(55,100	)		8,900
Total market, acquisition/dispositions and foreign exchange impact		168,700			26,400
AUA, balance at end of year	$	1,322,300		$	1,100,000

34 Royal Bank of Canada: Annual Report 2021 Management’s Discussion and Analysis

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Client assets – AUM	Table 22
	2021															2020
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
(Millions of Canadian dollars)	Money<br>market			Fixed<br>income			Equity			Multi-asset<br><br>and other			Total			Total
AUM, beginning balance	$	48,800		$	225,400		$	95,800		$	466,400		$	836,400		$	755,700
Institutional inflows		20,200			55,000			12,200			10,500			97,900			106,700
Institutional outflows		(16,300	)		(42,100	)		(6,300	)		(8,900	)		(73,600	)		(80,300	)
Personal flows, net		(2,400	)		3,300			3,400			46,700			51,000			31,300
Total net flows		1,500			16,200			9,300			48,300			75,300			57,700
Market impact		–			(400	)		33,400			90,200			123,200			17,700
Acquisition/dispositions		(4,500	)		–			–			–			(4,500	)		700
Foreign exchange		(2,400	)		(7,900	)		(1,300	)		(18,200	)		(29,800	)		4,600
Total market, acquisition/dispositions and<br>foreign exchange impact		(6,900	)		(8,300	)		32,100			72,000			88,900			23,000
AUM, balance at end of year	$	43,400		$	233,300		$	137,200		$	586,700		$	1,000,600		$	836,400
AUA by geographic mix and asset class	Table 23
---	---
(Millions of Canadian dollars)	2021		2020
---	---	---	---	---
Canada<br><br>(1)
Money market	$	24,700	$	25,900
Fixed income		29,200		32,000
Equity		91,300		68,800
Multi-asset and other		377,400		288,800
Total Canada		522,600		415,500
U.S.<br><br>(1)
Money market		49,500		39,700
Fixed income		90,300		107,300
Equity		256,000		195,400
Multi-asset and other		308,400		241,400
Total U.S.		704,200		583,800
Other International<br> <br>(1)
Money market		15,300		17,400
Fixed income		8,100		10,100
Equity		37,700		38,800
Multi-asset and other		34,400		34,400
Total International		95,500		100,700
Total AUA	$	1,322,300	$	1,100,000
(1)	Geographic information is based on the location from where our clients are served.
---	---

Financial performance

2021 vs. 2020

Net income increased $472 million or 22% from last year, mainly due to higher average fee-based client assets and average volume growth. These factors were partially offset by higher variable compensation and the impact of lower spreads.

Total revenue increased $1,166 million or 10%, mainly due to higher average fee-based client assets reflecting market appreciation and net sales, as well as average volume growth of 10% in loans and 17% in deposits. These factors were partially offset by lower spreads and the impact of foreign exchange translation.

PCL decreased $261 million in U.S. Wealth Management (including City National), as last year reflected elevated provisions on performing loans due to the impact of the COVID-19 pandemic as compared to releases in the current year primarily driven by improvements in our macroeconomic and credit quality outlook. Provisions on impaired loans in the prior year as compared to recoveries in the current year also contributed to the decrease, resulting in a decrease of 9 bps in the PCL on impaired loans ratio. For further details, refer to Credit quality performance in the Credit risk section.

Non-interest expense increased $806 million or 9%, mainly due to higher variable compensation commensurate with improved results. A legal provision in U.S. Wealth Management (including City National) as well as higher technology and staff-related costs also contributed to the increase. These factors were partially offset by the impact of foreign exchange translation.

AUA and AUM increased $222 billion or 20% and $164 billion or 20%, respectively, primarily due to market appreciation and net sales, partially offset by the impact of foreign exchange translation.

Business line review
Canadian Wealth Management
---

Canadian Wealth Management includes our full-service Canadian wealth advisory business, which is the largest in Canada as measured by AUA, with over 1,900 investment advisors providing comprehensive financial solutions with a focus on HNW and UHNW clients. Additionally, we provide discretionary investment management and estate and trust services to our clients through over 100 investment counsellors and over 100 trust professionals across Canada.

Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2021 35

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We compete with domestic banks and trust companies, investment counselling firms, bank-owned full-service brokerages and boutique brokerages, mutual fund companies, and global private banks. In Canada, bank-owned wealth managers continue to be the major players.

Financial performance

Revenue increased $589 million or 18% from last year, primarily due to higher average fee-based client assets reflecting market appreciation and net sales.

Selected highlights	Table 24
(Millions of Canadian dollars)	2021		2020
---	---	---	---	---
Total revenue	$	3,908	$	3,319
Other information
Average loans and acceptances, net		4,600		3,900
Average deposits		26,200		21,900
AUA <br>(1)		524,200		416,700
AUM <br>(1)		168,900		125,700
Average AUA		486,100		410,300
Average AUM		151,900		121,600
(1)	Represents year-end spot balances.
---	---

U.S. Wealth Management (including City National)

U.S. Wealth Management (including City National) also encompasses PCG and our C&C businesses. PCG is the 7 th largest full-service wealth advisory firm in the U.S., as measured by number of advisors, with over 2,100 financial advisors. Our C&C business delivers clearing and execution services for small to mid-sized independent broker-dealers and registered investment advisor firms. City National provides comprehensive financial solutions to affluent individuals, entrepreneurs, professionals, their businesses, and their families, and provides a premier banking and financial experience through a high-touch service model, proactive advice and financial solutions. City National offers a broad range of lending, deposit, cash management, equipment financing, wealth management, and other products and services. In the U.S., we operate in a fragmented and highly competitive industry. Our competitors include other broker-dealers, commercial banks and other financial institutions that service HNW and UHNW individuals, entrepreneurs and their businesses.

Financial performance

Revenue increased $204 million or 3% from last year. In U.S. dollars, revenue increased $482 million or 11%, primarily due to higher average fee-based client assets reflecting market appreciation and net sales, as well as average volume growth of 17% in loans and 28% in deposits. These factors were partially offset by lower spreads.

Lower spreads, mainly driven by the impact of lower interest rates and changes in average earning assets mix, resulted in NIM compression of 48 bps compared to the prior year.

Selected highlights	Table 25
(Millions of Canadian dollars,<br> <br>except as otherwise noted)	2021		2020
---	---	---	---	---
Total revenue<br><br>(1)	$	6,320	$	6,116
Other information<br>(Millions of U.S. dollars)
Total revenue<br><br>(1)		5,035		4,553
NIM		2.17%		2.65%
Average earning assets, net		86,300		68,900
Average loans, guarantees and letters of credit, net		60,200		51,600
Average deposits		83,000		64,700
AUA <br>(2)		568,800		438,200
AUM <br>(2)		182,100		137,300
Average AUA		525,300		424,600
Average AUM		165,600		130,200
(1)	Effective Q4 2021, gains (losses) on economic hedges of our U.S. share-based compensation plans, which are reflected in revenue, and related variability in share-based compensation expense driven by changes in the fair value of liabilities relating to our U.S. share-based compensation plans have been reclassified from our Wealth Management segment to Corporate Support. Comparative amounts have been reclassified to conform with this presentation.
---	---
(2)	Represents year-end spot balances.
---	---

36 Royal Bank of Canada: Annual Report 2021 Management’s Discussion and Analysis

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Global Asset Management

GAM provides global investment management services and solutions for individual and institutional investors in Canada, the U.K., the U.S., Europe, and Asia. We provide a broad range of investment management services through mutual, pooled and private funds, fee-based accounts, and separately managed portfolios. We distribute our investment solutions through a broad network of bank branches, our self-directed and full-service wealth advisory businesses, independent third-party advisors and private banks, and directly to individual clients. We also provide investment solutions directly to institutional clients, including pension plans, insurance companies, corporations, and endowments and foundations.

We are the largest retail fund company in Canada measured by AUM, as well as a leading institutional asset manager. We face competition in Canada from banks, insurance companies and asset management organizations. The Canadian fund management industry is large and mature, but remains a relatively fragmented industry.

In the U.S., our asset management business offers investment management solutions and services, primarily to institutional investors, and competes with independent asset management firms, as well as those that are part of national and international banks and insurance companies.

Internationally, through our global capabilities of BlueBay and RBC Global Asset Management ® , we offer investment management solutions for institutions and, through private banks including RBC Wealth Management ® , to HNW and UHNW investors. We face competition from asset managers that are owned by international banks, as well as national and regional asset managers in the geographies where we serve clients.

Financial performance

Revenue increased $418 million or 18% from last year, primarily due to higher average fee-based client assets reflecting market appreciation and net sales.

Selected highlights	Table 26
(Millions of Canadian dollars)	2021			2020
---	---	---	---	---	---
Total revenue	$	2,726		$	2,308
Other information
Canadian net long-term mutual fund sales <br>(1)		21,830			7,710
Canadian net money market mutual fund sales (redemptions) <br>(1)		(2,757	)		1,323
AUM <br>(2)		597,300			518,500
Average AUM		568,200			496,000
(1)	As reported to the Investment Funds Institute of Canada. Includes all prospectus-based mutual funds across our Canadian GAM businesses.
---	---
(2)	Represents year-end spot balances.
---	---

International Wealth Management

International Wealth Management includes operations in the U.K., Channel Islands and Asia. We provide customized and integrated trust, banking, credit, and investment solutions to HNW, UHNW and corporate clients in key financial centres. Competitors to our International Wealth Management business include global wealth managers, traditional offshore private banks and domestic wealth managers.

Financial performance

Revenue decreased $45 million or 12% from last year, mainly attributable to a decline in net interest income reflecting lower spreads.

Selected highlights	Table 27
(Millions of Canadian dollars)	2021		2020
---	---	---	---	---
Total revenue	$	342	$	387
Other information
Average loans, guarantees and letters of credit, net		4,600		4,400
Average deposits		12,500		13,000
AUA <br>(1)		86,800		93,400
AUM <br>(1)		8,900		9,200
Average AUA		90,500		95,500
Average AUM		9,300		9,000
(1)	Represents year-end spot balances.
---	---

Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2021 37

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Insurance

RBC Insurance ® offers a wide range of life, health, home, auto, travel, wealth, annuities, reinsurance advice and solutions, as well as business insurance solutions, to individual, business and group clients.

$5.6 billion	> 4.8 million	2,573
Total revenue	Number of clients	Employees
Premiums and Deposits<br> <br><br> <br><br> <br><br> <br>	RBC Insurance<br>®<br> is the largest Canadian bank-owned insurance organization on a total revenue basis and operates under two business lines: Canadian Insurance and International Insurance.<br> <br><br> <br>In Canada, we offer life, health, travel, home, and auto insurance products, wealth accumulation solutions, annuities, advice, and services through a wide variety of channels: advice centres, RBC Insurance<br>®<br> stores, mobile advisors, digital, mobile and social platforms, independent brokers, and travel partners.<br> <br><br> <br>Outside Canada, we operate globally in the reinsurance and retrocession markets offering life, disability and longevity reinsurance products.

2021 Operating environment

›	During fiscal 2021 the COVID-19 pandemic continued to amplify interest in insurance, increasing the need for information and advice, changing client preferences and behaviours, and challenging traditional operating models. We remained focused on strengthening our client-first culture, investing in new ways for clients to do business with us, enhancing access and convenience through digitization, and delivering increased value to clients beyond our products and pricing.
›	In Canada, regulators maintained their focus on fair treatment of customers, capital adequacy, insurer solvency, and data privacy. As a result, we continued to evolve our robust frameworks, controls and risk culture to protect clients and meet the expectations of both federal and provincial regulators.
---	---
›	In the U.K., there was a strong and sustained appetite for longevity risk transfer as companies continued to actively manage longevity risk. As a result, the longevity reinsurance market remained highly competitive in fiscal 2021. We continued to achieve strong growth in this market, within our risk limits.
---	---

38 Royal Bank of Canada: Annual Report 2021 Management’s Discussion and Analysis

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Strategic priorities

OUR STRATEGY	PROGRESS IN 2021	PRIORITIES IN 2022
Deepen client relationships	Launched a new whole life insurance product RBC Growth Insurance™ offering the benefits of tax-deferred growth to our clients<br> <br><br> <br>Enhanced our RBC<br>®<br> Guaranteed Investment Funds product with a new option that provides clients with greater flexibility to access their funds at any time without paying extra fees<br> <br><br> <br>Introduced a wellness spending account for our group insurance clients that provides flexible coverage for a variety of wellness-related expenses including stress management, personal development, and family care<br> <br><br> <br>Expanded our reach to home and auto clients through digital campaigns to ensure that they received assistance during the COVID-19 pandemic	Continue to be an innovative, client-focused provider of a full suite of insurance solutions for mass underserved, mass affluent and high net worth clients
Simplify.Agile.Innovate	Launched a new simplified electronic application process for some of our life insurance products to facilitate quicker decisions on applications and reduced time to purchase, making it easier to do business with us<br> <br><br> <br>Added Maple’s virtual primary care services as part of our offering for group insurance clients, providing a platform for our clients to consult with a physician at their convenience<br> <br><br> <br>Continued to innovate by investing in research and development to understand and meet the changing needs and expectations of underinsured Canadians	Simplify and innovate by continuing to accelerate our investments in digital initiatives, improving quality and cost effectiveness
Improve distribution effectiveness and efficiency	Enabled our agents and advisors with tools and technology to continue providing trusted advice in a virtual setting<br> <br><br> <br>Reduced wait times for our clients by simplifying and automating the underwriting processes for RBC Simplified Term<br> <br><br> <br>Continued to enhance the client experience by launching digital signature technology for our life insurance products, enabling clients to use their own personal devices to sign applications remotely	Continue to improve our distribution effectiveness and efficiency by enhancing both our proprietary and independent channels, and focusing on the delivery of technology and operational solutions
Grow the longevity business in Canada and the U.K.	Achieved strong growth in our longevity reinsurance business, largely due to our relationships within the U.K. reinsurance market, our longevity operations, and our underwriting expertise	Pursue niche opportunities to grow our longevity product lines within our risk limits

Outlook

The insurance industry is expected to continue experiencing change in the coming fiscal year driven by the ongoing impacts of the COVID-19 pandemic. Forces of change include evolving client expectations, accelerated digital disruption, and distribution innovation. Government and regulatory pressures are also expected to continue into fiscal 2022. As consumers focus more attention on overall health and well-being, we will continue to deliver services and create industry partnerships to assist our clients. In this rapidly evolving industry and economic environment, we will seek to maintain our strength through investments in technology, product and service innovation, efficient distribution channels, and a strong risk culture. We will also continue to re-define how we advise our clients and seek to provide them peace of mind. Additionally, the COVID-19 pandemic has created more awareness of the importance of financial security and has prompted people to take a closer look at their insurance coverage. We see this renewed demand continuing to drive growth opportunities. We believe that delivering on our business strategy will allow us to continue to thrive in this changing environment.

For further details on our general economic review and outlook, refer to the Economic, market and regulatory review and outlook section.

Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2021 39

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Insurance	Table 28
(Millions of Canadian dollars, except percentage amounts and as otherwise noted)	2021			2020
---	---	---	---	---	---
Non-interest income
Net earned premiums	$	4,840		$	4,267
Investment Income, gains/(losses) on assets supporting insurance policyholder liabilities <br>(1)		577			938
Fee income		183			156
Total revenue		5,600			5,361
PCL		(1	)		–
Insurance policyholder benefits and claims <br>(1)		3,547			3,384
Insurance policyholder acquisition expense		344			299
Non-interest expense		596			592
Income before income taxes		1,114			1,086
Net income	$	889		$	831
Revenue by business
Canadian Insurance	$	2,917		$	2,974
International Insurance		2,683			2,387
Key ratios
ROE		37.4%			36.1%
Selected balance sheet information
Average total assets	$	21,600		$	20,300
Other information
Premiums and deposits <br>(2)	$	5,721		$	4,950
Canadian Insurance		3,162			2,493
International Insurance		2,559			2,457
Insurance claims and policy benefit liabilities		12,816			12,215
Fair value changes on investments backing policyholder liabilities <br>(1)		(13	)		277
Number of employees (FTE)		2,573			2,772
(1)	Includes unrealized gains and losses on investments backing policyholder liabilities attributable to fluctuation of assets designated as FVTPL. The investments which support actuarial liabilities are predominantly fixed income assets designated as FVTPL. Consequently, changes in the fair values of these assets are recorded in Insurance premiums, investment and fee income in the Consolidated Statements of Income and are largely offset by changes in the fair value of the actuarial liabilities, the impact of which is reflected in PBCAE.
---	---
(2)	Premiums and deposits include premiums on risk-based insurance and annuity products, and individual and group segregated fund deposits, consistent with insurance industry practices.
---	---

Financial performance

2021 vs. 2020

Net income increased $58 million or 7% from last year, largely due to favourable annual actuarial assumption updates and lower claims costs. These factors were partially offset by lower favourable investment-related experience, including the impact of realized investment gains in the prior year, as well as a lower impact from reinsurance contract renegotiations.

Total revenue increased $239 million or 4%, mainly reflecting higher group annuity sales as well as business growth, both of which are largely offset in PBCAE as indicated below. These factors were partially offset by the change in fair value of investments backing policyholder liabilities and the impact of realized investment gains in the prior year.

PBCAE increased $208 million or 6%, mainly reflecting higher group annuity sales and business growth, both of which are largely offset in revenue. Lower favourable investment-related experience and a lower impact from reinsurance contract renegotiations also contributed to the increase. These factors were partially offset by the change in fair value of investments backing policyholder liabilities, favourable annual actuarial assumption updates in the current year largely related to mortality and economic assumptions, and lower claims costs mainly in our travel and disability products.

Non-interest expense increased $4 million or 1%, as higher legal costs were largely offset by the benefit of ongoing efficiency initiatives.

Business line review
Canadian Insurance
---

We offer life, health, travel, home, and auto insurance products (in partnership agreement with Aviva Canada), wealth accumulation solutions, and payout annuities to individual, group, HNW, and business clients across Canada. Our life and health portfolio includes participating whole life, universal life, term life, critical illness, disability, and group benefits such as long-term disability, and health and dental. Wealth solutions include a family of segregated funds as well as individual payout annuities. Our travel products include out-of-province/country medical coverage, and trip cancellation and interruption insurance.

Our group annuities business helps defined benefit pension plan sponsors better manage and control risk. RBC Insurance has a set of strategies and initiatives aimed at building our momentum and positioning us for growth in this product line where companies are increasingly looking to transfer the risks associated with their pension obligations to insurance companies – either through group annuity contracts or longevity swap products.

In Canada, many of our competitors specialize in life and health or property and casualty products. As a multi-line carrier, we offer a broad suite of solutions for individuals and businesses, including disability, life, home, auto and travel products along with wealth, group health and dental and pension solutions. Within these product lines, we hold market leadership positions in disability insurance and wealth products.

Financial performance

Total revenue decreased $57 million or 2% from last year, mainly due to the change in fair value of investments backing policyholder liabilities and the impact of realized investment gains in the prior year. These factors were partially offset by higher group annuity sales and business growth, primarily in segregated fund and individual life products, both of which are largely offset in PBCAE.

40 Royal Bank of Canada: Annual Report 2021 Management’s Discussion and Analysis

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Premiums and deposits increased $669 million or 27%, mainly due to group annuity, segregated fund and individual life products.

Selected highlights	Table 29
(Millions of Canadian dollars)	2021			2020
---	---	---	---	---	---
Total revenue	$	2,917		$	2,974
Other information
Premiums and deposits
Life and health		1,434			1,397
Property and casualty		77			98
Annuity and segregated fund deposits		1,651			998
Fair value changes on investments backing policyholder liabilities		(119	)		351

International Insurance

International Insurance is primarily comprised of our reinsurance businesses which insure risks of other insurance and reinsurance companies. We offer life, disability and longevity reinsurance products.

The global reinsurance market is competitive and reflects significant market share in the U.S., U.K, and Europe being held by a small number of reinsurers.

Financial performance

Total revenue increased $296 million or 12% from last year, mainly due to the change in fair value of investments backing policyholder liabilities and business growth in longevity reinsurance.

Premiums and deposits increased $102 million or 4% as growth in longevity reinsurance was partially offset by declining volumes in International life and life retrocession products.

Selected highlights	Table 30
(Millions of Canadian dollars)	2021		2020
---	---	---	---	---	---
Total revenue	$	2,683	$	2,387
Other information
Premiums and deposits
Life and health		1,050		1,144
Annuity		1,509		1,313
Fair value changes on investments backing policyholder liabilities		106		(74	)

Investor & Treasury Services

Investor & Treasury Services provides asset servicing, custody, payments and treasury services to financial and other investors worldwide. We are a trusted partner with offices in 16 countries in North America, Europe, the U.K., and Asia-Pacific. Our focus is on safeguarding client assets and simplifying our clients’ operations in support of their growth.

$4.6 trillion	14.0%	$64.4 billion
Assets under administration	Return on equity	Average client deposits
Revenue by Geography<br> <br><br> <br><br> <br><br> <br><br> <br><br> <br>	Our product and service offering includes custody, fund and investment administration, shareholder services, private capital services, performance measurement and compliance monitoring, distribution, transaction banking, and treasury and market services (including cash and liquidity management, foreign exchange services and global securities finance). We deliver digitally-enabled products and services which continue to be enhanced and evolved in line with our clients’ changing needs.<br> <br><br> <br>We compete against the world’s largest custodians in selected countries in North America, Europe, the U.K., and Asia-Pacific.

Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2021 41

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2021 Operating environment

›	Results for our asset services business were impacted by industry headwinds such as persistent low interest rates and continued pricing pressure.
›	Our funding and liquidity business also managed through revenue headwinds from the ongoing low interest rate environment, including compressed spreads.
---	---
›	We continued to execute on initiatives to improve our cost structure and upgrade our technology capabilities.
---	---

Strategic priorities

OUR STRATEGY	PROGRESS IN 2021	PRIORITIES IN 2022
Be the #1 asset services provider in Canada	Our AUA in Canada grew by 12% year-over-year	Continue to grow income and market share<br>among Canadian asset managers, investment<br>counsellors, pension funds, insurance<br>companies and transaction banking clients
Compete in selected fast growing asset servicing segments and markets	Achieved higher Fund Finance sales, driven by strong brand recognition and cross-segment collaboration	Focus on fast growing markets and products<br>where we have competitive advantages<br> <br><br> <br>Complete the execution of our ongoing<br>repositioning initiatives by exiting non-core<br>operations
Deliver seamless client experiences and employ technology to enable our clients’ success	Evolved our digital offering, improving interactive applications to increase clients’ digital self-service capacity and reduce operational risk	Continue to deliver seamless digital client<br>experiences<br> <br><br> <br>Continue to invest in technology to enable our<br>clients’ success

Outlook

In fiscal 2022, we expect the global asset services industry will remain challenging. While we expect some benefit from rising interest rates in fiscal 2022, ongoing fee reductions, competition from global custody providers in key markets and the impact of reduced client activities are expected to constrain revenue growth. Ongoing inflationary pressures also have the potential to impact our results in fiscal 2022. Improving operational efficiency and completing ongoing repositioning initiatives will continue to be a priority. We will focus on business opportunities in our chosen fast-growing markets and segments where we have competitive advantages, and leveraging our investment in technology to enable our clients’ success.

We will continue to prioritize prudent risk and funding management amidst an evolving interest rate and liquidity environment. Market liquidity levels are anticipated to remain elevated as monetary policy is expected to remain accommodative.

For further details on our general economic review and outlook, refer to the Economic, market and regulatory review and outlook section.

Investor & Treasury Services	Table 31
(Millions of Canadian dollars, except percentage amounts and as otherwise noted)			2020
---	---	---	---	---
Net interest income	460		$	329
Non-interest income	1,704			1,982
Total revenue	2,164			2,311
PCL on performing assets	(8	)		6
PCL on impaired assets	–			–
PCL	(8	)		6
Non-interest expense	1,589			1,589
Income before income taxes	583			716
Net income	440		$	536
Key ratios
ROE	14.0%			15.9%
Selected balance sheet information
Average total assets	235,400		$	204,300
Average deposits	219,800			187,900
Average client deposits	64,400			63,000
Average wholesale funding deposits	155,400			124,900
Other information
AUA (1)	4,640,900		$	4,483,500
Average AUA	4,634,900			4,386,300
Number of employees (FTE) (2)	3,718			3,851
Estimated impact of U.S. dollar, British pound and Euro translation on key income statement items
(Millions of Canadian dollars, except percentage amounts)
Increase (decrease):
Total revenue	(22	)
PCL	–
Non-interest expense	(15	)
Net income	(9	)
Percentage change in average U.S. dollar equivalent of C1.00	7%
Percentage change in average British pound equivalent of C1.00	–
Percentage change in average Euro equivalent of C1.00	2%

All values are in US Dollars.

(1)	Represents year-end spot balances.
(2)	Effective Q1 2021, certain employees have been reclassified from Investor & Treasury Services to Corporate Support. Prior period amounts have been reclassified to conform with this presentation.
---	---

42 Royal Bank of Canada: Annual Report 2021 Management’s Discussion and Analysis

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Financial performance

2021 vs. 2020

Net income decreased $96 million or 18% from last year, primarily driven by lower revenue from client deposits and funding and liquidity.

Total revenue decreased $147 million or 6%, mainly due to lower client deposit revenue largely driven by lower interest rates. Lower funding and liquidity revenue also contributed to the decrease, mainly reflecting net favourable impacts from market volatility and interest rate movements in the prior year, as well as the impact of lower interest rates and lower gains from the disposition of securities, partially offset by a greater impact in the prior year from elevated enterprise liquidity.

Non-interest expense remained relatively flat as higher technology-related costs and higher net costs associated with ongoing efficiency initiatives were largely offset by the impact of foreign exchange translation.

Capital Markets

RBC Capital Markets ® is a premier global investment bank providing expertise in advisory & origination, sales & trading, and lending & financing to corporations, institutional investors, asset managers, private equity firms and governments globally. Our professionals ensure that clients receive the advice, products, and services their businesses need from 58 offices in 14 countries. Our presence extends across North America, the U.K. & Europe, and Australia, Asia & other regions.

>15,500	#11	6,414
Number of clients	Global league table rankings<br>1	Employees
Revenue by Geography<br> <br><br> <br>	We operate two main business lines, Corporate and Investment Banking and Global Markets.<br> <br><br> <br>In North America, we offer a full suite of products and services which include equity and debt origination and distribution, advisory services, and sales & trading. In Canada, we are a market leader with a strategic presence in all lines of capital markets businesses. In the U.S., where our competitors include large global investment banks, we have a full industry sector coverage and investment banking product range, as well as capabilities in credit, secured lending, municipal finance, fixed income, currencies & commodities, and equities.<br> <br><br> <br>Outside North America, we have a targeted strategic presence in the U.K. & Europe, Australia, Asia & other markets aligned to our global expertise. In the U.K. & Europe, we offer a diversified set of capabilities in key industry sectors of focus. In Australia and Asia, we compete with global and regional investment banks in targeted areas aligned to our global expertise, including fixed income distribution and currencies trading, secured financing, as well as corporate and investment banking.

2021 Operating environment

›	The fiscal 2021 operating environment was characterized by a rebound in investment banking activity as a result of robust deal flow commensurate with global investment banking fee pool growth of 37%<br>1<br>. Equity Capital Markets (ECM), M&A, and loan syndication fee pools reached record highs during the fiscal year, benefitting from the re-opening of economies resulting in strong deal flow, compared to a muted environment in the prior fiscal year against an uncertain economic outlook and backdrop.
›	Trading activity was elevated in the first quarter of the fiscal year as markets continued to benefit from volatility-driven tailwinds that characterized the second half of 2020. However, toward the end of the second quarter of fiscal 2021, trading results began to be impacted by market normalization, albeit remaining above pre-pandemic levels. This was particularly prevalent in fixed income trading which saw results impacted by reduced client activity. Repo–related financing also decreased driven by spread compression as the market became more liquid and client demand for secured funding declined.
---	---
›	Improvements in the credit environment, driven by the economic recovery from the COVID-19 pandemic, led to favourable changes in our macroeconomic and credit quality outlook, resulting in releases of provisions on performing assets and lower provisions on impaired loans.
---	---
1	Source: Dealogic, based on global investment bank fees, Fiscal 2021 as of November 21, 2021
---	---

Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2021 43

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Strategic priorities

OUR STRATEGY	PROGRESS IN 2021	PRIORITIES IN 2022
Build Deep, Multi-Product Client Relationships	Continued to deepen relationships with clients resulting in high quality mandates in Corporate and Investment Banking and numerous franchise firsts in Global Markets<br> <br><br> <br>Acted as lead-left bookrunner on Alexandria Real Estate’s US$1.3 billion equity follow-on offering which was the largest REIT equity offering since 2013	Maintain our leadership position in Canada and our position as the Canadian leader in the U.S., our largest market with the best opportunity for growth<br> <br><br> <br>Continue to be a leader in targeted areas in the U.K., Europe and Australia, Asia & other regions aligned with our global expertise<br> <br><br> <br>Expand client coverage in underpenetrated sectors and products
Lead with Advice, Solutions and Innovation	Drove higher levels of client engagement through the provision of differentiated insights and services<br> <br><br> <br>Reorganized our Global Markets business, elevating our research platform and embedding electronic and digital capabilities across sales & trading businesses<br> <br><br> <br>Acted as lead structuring agent and joint bookrunner on Telus’ C$750 million sustainability-linked bond which was the first of its kind in the Canadian Market	Grow advisory & origination and accelerate Sustainable Finance across all business areas and continue to provide Environmental, Social and Governance (ESG) related and sustainability advice to clients<br> <br><br> <br>Enhance sales & trading client value and insights from scaled electronic and digital strategy
Leverage Cross Platform Collaboration	Further aligned our delivery capabilities with how our clients do business<br> <br><br> <br>Shifted to global business structures to improve collaboration and drive enhanced client coverage<br> <br><br> <br>Advised Blackstone on its US$5.6 billion acquisition of U.K. company Signature Aviation	Continue to drive cross-platform and geographic collaboration across businesses and asset classes
Invest in, Engage and Enable our Talent	Engaged and developed our talent at all levels, with numerous key senior hires made across businesses while championing internal mobility<br> <br><br> <br>Advanced our Diversity & Inclusion strategy and continued to improve representation of diverse talent	Renew focus on talent development programs and accelerate Diversity & Inclusion strategy
Simplify, Prioritize and Leverage our Scale	Focused on productivity and efficiency measures, supported by key performance indicators to monitor progress	Continue to optimize balance sheet utilization and strategically reallocate resources
Evolve our Brand as an Innovative, Trusted Partner	Successfully maintained #1 market share position in Canada<br>1<br> and ranked as #1 Canadian Investment Bank in the U.S.<br>1<br> and continued to be viewed as a trusted advisor / financer in the U.K., Europe, Asia and Australia<br> <br><br> <br>Recognized by Greenwich Associates<br>2<br> as a market leader in Canada for equities trading and research and won the Celent Model Sell Side Award 2021<br>3<br> for Aiden<br>®<br><br>4<br> <br><br> <br>Advised Australia’s New South Wales government on its A$11.1 billion sale of WestConnex Motorway to Sydney Transport Partners	Be recognized by our clients as an innovative, trusted partner with best in class capabilities

Outlook

In fiscal 2022, we see constructive markets as a potential tailwind for M&A activity. We will continue to pursue market share growth opportunities in our Investment Banking business, with a focus on targeted sectors and investment in talent. While we anticipate our trading businesses will continue to be impacted by normalization, our focus remains on delivering robust results across our Global Markets franchise through continued resource optimization, acceleration of cross-selling activities, further deployment of electronic and digital capabilities, and building on our strong risk management practices. In Corporate Banking, we will continue to pursue a moderate growth approach consistent with our focus on our balance sheet-enabled strategy to deepen relationships with lending clients in order to drive growth in our non-lending businesses. This strategy will continue to be underpinned by strong credit risk management practices, optimization of risk-weighted assets (RWA), and supporting our clients in the execution of their strategies.

For further details on our general economic review and outlook, refer to the Economic, market and regulatory review and outlook section.

1	Source: Dealogic, based on global investment bank fees, Fiscal 2021
2	Source: Greenwich Associates Awards, Fiscal 2021
---	---
3	Source: Celent Model, Fiscal 2021
---	---
4	Aiden<br>®<br> is an AI-based electronic trading platform that uses the computational power of deep reinforcement learning in its pursuit of improved trading results and insights for clients.
---	---

44 Royal Bank of Canada: Annual Report 2021 Management’s Discussion and Analysis

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Capital Markets	Table 32
(Millions of Canadian dollars, except percentage amounts and as otherwise noted)			2020
---	---	---	---	---	---
Net interest income (1)	4,553		$	5,135
Non-interest income (1)	5,634			4,749
Total revenue (1)	10,187			9,884
PCL on performing assets	(476	)		750
PCL on impaired assets	(33	)		489
PCL	(509	)		1,239
Non-interest expense	5,427			5,362
Income before income taxes	5,269			3,283
Net income	4,187		$	2,776
Revenue by business
Corporate and Investment Banking	4,823		$	4,031
Global Markets	5,542			6,251
Other	(178	)		(398	)
Key ratios
ROE	18.3%			11.7%
Selected balance sheet information
Average total assets	710,200		$	755,400
Average trading securities	122,900			108,300
Average loans and acceptances, net	100,000			108,700
Average deposits	73,500			76,800
Other information
Number of employees (FTE) (2)	6,414			6,258
Credit information
PCL on impaired loans as a % of average net loans and acceptances	(0.04)%			0.44%
Estimated impact of U.S. dollar, British pound and Euro translation on key income statement items
(Millions of Canadian dollars, except percentage amounts)
Increase (decrease):
Total revenue	(423	)
PCL	25
Non-interest expense	(219	)
Net income	(187	)
Percentage change in average U.S. dollar equivalent of C1.00	7%
Percentage change in average British pound equivalent of C1.00	–
Percentage change in average Euro equivalent of C1.00	2%

All values are in US Dollars.

(1)	The teb adjustment for 2021 was $518 million (2020 – $513 million). For further discussion, refer to the How we measure and report our business segments section.
(2)	Amounts have been revised from those previously presented.
---	---

Financial performance

2021 vs. 2020

Net income increased $1,411 million or 51% from last year, primarily driven by lower PCL and higher revenue in Corporate and Investment Banking. These factors were partially offset by higher taxes reflecting an increase in the proportion of earnings from higher tax rate jurisdictions, and lower revenue in Global Markets.

Total revenue increased $303 million or 3%, mainly due to higher M&A and loan syndication activity, as well as higher equity trading revenue, across most regions. Lower residual funding costs, higher revenue associated with certain non-trading portfolios, higher equity origination across most regions, and gains from the disposition of certain investment securities also contributed to the increase. These factors were partially offset by lower fixed income trading revenue across all regions due to spread compression in repo and secured financing products and reduced client activity, as well as the impact of foreign exchange translation.

PCL decreased $1,748 million, as last year reflected elevated provisions on performing assets due to the impact of the COVID-19 pandemic as compared to releases in the current year primarily driven by improvements in our macroeconomic and credit quality outlook. Provisions on impaired loans in the prior year as compared to recoveries in the current year, largely in the

Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2021 45

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oil and gas sector, also contributed to the decrease, resulting in a decrease of 48 bps in the PCL on impaired loans ratio. For further details, refer to Credit quality performance in the Credit risk section.

Non-interest expense increased $65 million or 1%, as higher compensation on improved results was largely offset by the impact of foreign exchange translation.

Business line review
Corporate and Investment Banking
---

Corporate and Investment Banking comprises our corporate lending, municipal finance, loan syndication, debt and equity origination, and M&A advisory services. For debt and equity origination, revenue is allocated between Corporate and Investment Banking and Global Markets based on the contribution of each group in accordance with an established agreement.

Financial performance

Corporate and Investment Banking revenue of $4,823 million increased $792 million or 20% from last year.

Investment Banking revenue increased $802 million or 46%, primarily due to higher M&A and loan syndication activity across most regions. Higher fixed income trading revenue in the U.S. and Europe, reflecting the impact of loan underwriting markdowns in the prior year, higher equity origination across most regions, and higher revenue associated with certain non-trading portfolios also contributed to the increase. These factors were partially offset by the impact of foreign exchange translation.

Lending and other revenue remained relatively flat.

Selected highlights	Table 33
(Millions of Canadian dollars)	2021		2020
---	---	---	---	---
Total revenue<br> <br>(1)	$	4,823	$	4,031
Breakdown of revenue<br> <br>(1)
Investment banking		2,559		1,757
Lending and other <br>(2)		2,264		2,274
Other information
Average assets		81,400		92,600
Average loans and acceptances, net		73,300		83,000
(1)	The teb adjustment for the year ended October 31, 2021 was $37 million (October 31, 2020 – $56 million). For further discussion, refer to the How we measure and report our business segments section.
---	---
(2)	Comprises our corporate lending, client securitization, and global credit businesses.
---	---

Global Markets

Global Markets comprises our sales and trading businesses including fixed income, foreign exchange, commodities, and equities, as well as our repo and secured financing products.

Financial performance

Global Markets revenue of $5,542 million decreased $709 million or 11% from last year.

Revenue in our Fixed income, currencies and commodities business decreased $365 million or 11%, largely driven by lower fixed income trading revenue across all regions due to reduced client activity, and the impact of foreign exchange translation. These factors were partially offset by gains from the disposition of certain investment securities.

Revenue in our Equities business increased $128 million or 9%, primarily due to higher equity trading revenue across all regions, partially offset by the impact of foreign exchange translation.

Revenue in our Repo and secured financing business decreased $472 million or 29%, mainly due to spread compression and reduced client activity driven by increased market liquidity.

Selected highlights	Table 34
(Millions of Canadian dollars)	2021		2020
---	---	---	---	---
Total revenue<br> <br>(1)	$	5,542	$	6,251
Breakdown of revenue<br> <br>(1)
Fixed income, currencies<br>and commodities		2,878		3,243
Equities		1,531		1,403
Repo and secured financing <br>(2)		1,133		1,605
Other information
Average assets		626,500		667,900
(1)	The teb adjustment for the year ended October 31, 2021 was $481 million (October 31, 2020 – $457 million). For further discussion, refer to the How we measure and report our business segments section.
---	---
(2)	Comprises our secured funding businesses for internal businesses and external clients.
---	---

Other

Other includes our legacy portfolio, which mainly consists of our U.S. commercial mortgage-backed securities (MBS), bank-owned life insurance (BOLI) derivative contracts and structured rates in Asia.

46 Royal Bank of Canada: Annual Report 2021 Management’s Discussion and Analysis

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Financial performance

Revenue increased $220 million from last year, largely due to lower residual funding costs.

Corporate Support

Corporate Support consists of Technology & Operations, which provides the technological and operational foundation required to effectively deliver products and services to our clients, Functions, which includes our finance, human resources, risk management, internal audit and other functional groups, as well as our Corporate Treasury function. Reported results for Corporate Support mainly reflect certain activities related to monitoring and oversight of enterprise activities which are not allocated to business segments. For further details, refer to the How we measure and report our business segments section.

Corporate Support	Table 35
(Millions of Canadian dollars)	2021			2020
---	---	---	---	---	---	---
Net interest income (loss) <br>(1)	$	(321	)	$	(57	)
Non-interest income (loss) <br>(1), (2)		421			(179	)
Total revenue<br><br>(1), (2)		100			(236	)
PCL		(1	)		1
Non-interest expense <br>(2)		405			146
Income (loss) before income taxes<br><br>(1), (2)		(304	)		(383	)
Income taxes (recoveries) <br>(1)<br>, <br>(2)		(365	)		(436	)
Net income (loss)<br><br>(2)	$	61		$	53
(1)	Teb adjusted.
---	---
(2)	Effective Q4 2021, gains (losses) on economic hedges of our U.S. share-based compensation plans, which are reflected in revenue, and related variability in share-based compensation expense driven by changes in the fair value of liabilities relating to our U.S. share-based compensation plans have been reclassified from our Wealth Management segment to Corporate Support. Comparative amounts have been reclassified to conform with this presentation.
---	---

Due to the nature of activities and consolidation adjustments reported in this segment, we believe that a comparative period analysis is not relevant. The following identifies material items affecting the reported results in each year.

Total revenue and Income taxes (recoveries) in each period in Corporate Support include the deduction of the teb adjustments related to the gross-up of income from Canadian taxable corporate dividends and the U.S. tax credit investment business recorded in Capital Markets. The amount deducted from revenue was offset by an equivalent increase in Income taxes (recoveries).

The teb amount for the year ended October 31, 2021 was $518 million and was $513 million last year. For the year ended October 31, 2021, revenue included gains of $394 million (October 31, 2020: gains of $90 million) on economic hedges of our U.S. Wealth Management (including City National) share-based compensation plans, and non-interest expense included $382 million (October 31, 2020: $89 million) of share-based compensation expense driven by changes in the fair value of liabilities relating to our U.S. Wealth Management (including City National) share-based compensation plans.

The following identifies the material items, other than the teb impacts noted previously, affecting the reported results in each year.

2021

Net income was $61 million, primarily due to asset/liability management activities and residual unallocated items, partially offset by net unfavourable tax adjustments.

2020

Net income was $53 million, largely due to asset/liability management activities, partially offset by net unfavourable tax adjustments and residual unallocated costs.

Quarterly financial information
Fourth quarter performance
---

Q4 2021 vs. Q4 2020

Fourth quarter net income of $3,892 million was up $646 million or 20% from a year ago. Diluted earnings per share (EPS) of $2.68 was up $0.45 and return on common equity (ROE) of 16.9% was up 90 bps. Our Common Equity Tier 1 (CET1) ratio of 13.7% was up 120 bps from a year ago. Our results reflected higher earnings across all of our business segments.

Total revenue increased $1,284 million or 12%, mainly due to higher group annuity sales, which is largely offset in PBCAE as indicated below, and higher average fee-based client assets reflecting market appreciation and net sales. Higher M&A activity across all regions and higher revenue associated with certain non-trading portfolios in Capital Markets also contributed to the increase. In Canadian Banking and U.S. Wealth Management (including City National), volume growth more than offset the impact of lower spreads. These factors were partially offset by the impact of foreign exchange translation, and lower fixed income trading revenue across all regions as the prior year benefitted from increased client activity amidst elevated market volatility.

Total PCL decreased $654 million and the PCL on loans ratio of (12) bps decreased 35 bps from last year, due to lower provisions in Personal & Commercial Banking, Capital Markets and Wealth Management.

PBCAE increased $571 million, primarily due to higher group annuity sales, which is largely offset in revenue. Lower favourable investment-related experience and business growth, primarily in longevity reinsurance, also contributed to the increase. These factors were partially offset by favourable annual actuarial assumption updates in the current year largely related to mortality and economic assumptions.

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Non-interest expense increased $525 million or 9%, mainly attributable to higher variable compensation on improved results and higher staff-related costs. A legal provision in U.S. Wealth Management (including City National) also contributed to the increase. These factors were partially offset by the impact of foreign exchange translation.

Income tax expense increased $196 million or 22%, primarily due to higher income before income taxes in the current quarter. The effective income tax rate of 22.0% increased 30 bps from last year, mainly due to the impact of changes in earnings mix.

Q4 2021 vs. Q3 2021

Net income of $3,892 million was down $404 million or 9% compared to last quarter, primarily due to lower releases of PCL, lower spreads in Canadian Banking and U.S. Wealth Management (including City National), and a legal provision in U.S. Wealth Management (including City National). These factors were partially offset by lower variable compensation.

Quarterly results and trend analysis

Our quarterly results are impacted by a number of trends and recurring factors, which include seasonality of certain businesses, general economic and market conditions, and fluctuations in the Canadian dollar relative to other currencies. The following table summarizes our results for the last eight quarters (the period):

Quarterly results<br><br>(1)	Table 36
	2021											2020
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
(Millions of Canadian dollars, except per<br> <br>share and percentage amounts)		Q4			Q3			Q2			Q1		Q4			Q3		Q2			Q1
Personal & Commercial Banking	$	4,605		$	4,651		$	4,527		$	4,563	$	4,373		$	4,348	$	4,400		$	4,610
Wealth Management <br>(2)		3,444			3,373			3,260			3,219		3,061			3,008		2,955			3,106
Insurance		1,501			1,754			536			1,809		958			2,212		197			1,994
Investor & Treasury Services		548			517			534			565		521			484		709			597
Capital Markets <br>(3)		2,298			2,463			2,718			2,708		2,275			2,748		2,313			2,548
Corporate Support <br>(2), (3)		(20	)		(2	)		43			79		(96	)		120		(241	)		(19	)
Total revenue		12,376			12,756			11,618			12,943		11,092			12,920		10,333			12,836
PCL		(227	)		(540	)		(96	)		110		427			675		2,830			419
PBCAE		1,032			1,304			149			1,406		461			1,785		(177	)		1,614
Non-interest expense		6,583			6,420			6,379			6,542		6,058			6,380		5,942			6,378
Income before income taxes		4,988			5,572			5,186			4,885		4,146			4,080		1,738			4,425
Income taxes		1,096			1,276			1,171			1,038		900			879		257			916
Net income	$	3,892		$	4,296		$	4,015		$	3,847	$	3,246		$	3,201	$	1,481		$	3,509
EPS – basic	$	2.68		$	2.97		$	2.76		$	2.66	$	2.23		$	2.20	$	1.00		$	2.41
– diluted		2.68			2.97			2.76			2.66		2.23			2.20		1.00			2.40
Effective income tax rate		22.0%			22.9%			22.6%			21.2%		21.7%			21.5%		14.8%			20.7%
Period average US$ equivalent<br>of C$1.00	$	0.796		$	0.812		$	0.798		$	0.779	$	0.756		$	0.737	$	0.725		$	0.760
(1)	Fluctuations in the Canadian dollar relative to other foreign currencies have affected our consolidated results over the period.
---	---
(2)	Effective Q4 2021, gains (losses) on economic hedges of our U.S. share-based compensation plans, which are reflected in revenue, and related variability in share-based compensation expense driven by changes in the fair value of liabilities relating to our U.S. share-based compensation plans have been reclassified from our Wealth Management segment to Corporate Support. Comparative amounts have been reclassified to conform with this presentation.
---	---
(3)	Teb adjusted. For further discussion, refer to the How we measure and report our business segments section of this 2021 Annual Report.
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Seasonality

Seasonal factors may impact our results in certain quarters. The first quarter has historically been stronger for our Capital Markets businesses. The second quarter has fewer days than the other quarters, which generally results in a decrease in net interest income and certain expense items. The third and fourth quarters include the summer months which generally results in lower client activity and may negatively impact the results of our Capital Markets trading business.

Trend analysis

Earnings have generally trended upward over the period. However, earnings in the second quarter of 2020 reflected the impact of the onset of the COVID-19 pandemic across all of our business segments which resulted in a significant increase in PCL and fluctuations in revenue from the impact of market volatility, including interest rates and credit spreads, as well as client activity. Market conditions subsequently improved, and while impacts from the COVID-19 pandemic and its associated downstream implications persist, earnings have increased since the second quarter of 2020. Quarterly earnings are also affected by the impact of foreign exchange translation.

Personal & Commercial Banking revenue has benefitted from solid volume growth over the period. NIM has been negatively impacted by margin compression over the period from the lower interest rate environment, mainly reflecting cumulative BoC rate cuts of 150 bps in the second quarter of 2020.

Wealth Management revenue has benefitted from growth in average-fee based client assets, as well as volume growth over the period. The lower interest rate environment, mainly reflecting the cumulative U.S. Fed rate cuts of 150 bps in the second quarter of 2020, has negatively impacted revenue over the period.

Insurance revenue has fluctuated over the period, primarily due to the impact of changes in the fair value of investments backing policyholder liabilities as well as the timing of group annuity sales, both of which are largely offset in PBCAE. The first quarters of 2020 and 2021 as well as Q4 2021 reflect higher group annuity sales.

Investor & Treasury Services revenue has been impacted by interest rate movements, market volatility and client activity over the period, which resulted in heightened fluctuations in the second and third quarters of 2020 following the onset of the COVID-19 pandemic.

48 Royal Bank of Canada: Annual Report 2021 Management’s Discussion and Analysis

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Capital Markets revenue is influenced, to a large extent, by market conditions that impact client activity, with first quarter results generally stronger than those in the remaining quarters. Markets experienced significant levels of volatility following the onset of the COVID-19 pandemic, which resulted in increased client activity and fluctuations in trading revenue, including higher trading revenue in the third quarter of 2020 and the first quarter of 2021. Elevated market volatility in the second quarter of 2020 also resulted in loan underwriting markdowns, with partial reversals in the latter half of 2020. 2021 generally saw strong results from M&A and loan syndication activity as well as equity origination.

PCL on assets is comprised of provisions taken on performing assets and provisions taken on impaired assets. PCL on performing assets has fluctuated over the period as it is impacted by macroeconomic conditions, changes in exposures and credit quality. The impact of the COVID-19 pandemic resulted in a significant increase in provisions in 2020, largely in the second quarter. Throughout 2021, we saw improvements in our macroeconomic and credit quality outlook resulting in releases of provisions on performing assets. PCL on impaired assets trended lower over the period. The recovery that has been underway since the sharp drop of economic activity in calendar Q2 2020 as well as the impact of the COVID-19 related government support and calendar 2020 payment deferral programs, resulted in lower provisions, largely in our Canadian Banking retail portfolios beginning the second half of 2020. We saw higher provisions on impaired loans in Capital Markets, largely in the oil and gas sector, over the majority of 2020. Throughout 2021, we saw lower provisions on impaired loans in Capital Markets, largely due to recoveries in the oil and gas sector.

PBCAE has fluctuated over the period as it includes the impact of changes in the fair value of investments backing policyholder liabilities and the impact of group annuity sales, both of which are largely offset in Revenue. The fair value of investments backing policyholder liabilities is impacted by changes in market conditions. PBCAE has also fluctuated due to the impact of investment-related experience and claims costs over the period. Actuarial adjustments, which generally occur in the fourth quarter of each year, also impact PBCAE.

Non-interest expense has generally trended upwards over the period. Variable compensation has fluctuated over the period, commensurate with fluctuations in revenue and earnings, including the impact of decreased results in the second quarter of 2020. Changes in the fair value of our U.S. share-based compensation plans, which are largely offset in revenue, have also contributed to fluctuations over the period and are impacted by market conditions. While we continue to focus on efficiency management activities, expenses over the period reflect our ongoing investments in people and technology, including digital initiatives. Beginning in the second quarter of 2020, Non-interest expense also reflected incremental COVID-19 related costs, though these costs have subsided in 2021.

Our effective income tax rate has fluctuated over the period, mostly due to varying levels of tax adjustments and changes in earnings mix. The second quarter of 2020 saw a decrease mainly due to a higher proportion of tax exempt income and income from lower tax rate jurisdictions relative to lower earnings in that quarter.

Financial condition
Condensed balance sheets
---
Table 37
---
As at October 31 (Millions of Canadian dollars)	2021			2020
---	---	---	---	---	---	---
Assets
Cash and due from banks	$	113,846		$	118,888
Interest-bearing deposits with banks		79,638			39,013
Securities, net of applicable allowance <br>(1)		284,724			275,814
Assets purchased under reverse repurchase agreements and securities borrowed		307,903			313,015
Loans
Retail		503,598			457,976
Wholesale		218,066			208,655
Allowance for loan losses		(4,089	)		(5,639	)
Other – Derivatives		95,541			113,488
– Other <br>(2)		107,096			103,338
Total assets	$	1,706,323		$	1,624,548
Liabilities
Deposits	$	1,100,831		$	1,011,885
Other – Derivatives		91,439			109,927
– Other <br>(2)		405,698			406,102
Subordinated debentures		9,593			9,867
Total liabilities		1,607,561			1,537,781
Equity attributable to shareholders		98,667			86,664
Non-controlling interests		95			103
Total equity		98,762			86,767
Total liabilities and equity	$	1,706,323		$	1,624,548
(1)	Securities are comprised of trading and investment securities.
---	---
(2)	Other – Other assets and liabilities include Segregated fund net assets and liabilities, respectively.
---	---

2021 vs. 2020

Total assets increased $82 billion or 5% from last year. Foreign exchange translation decreased total assets by $68 billion.

Cash and due from banks was down $5 billion or 4%, primarily due to lower deposits with central banks, reflecting our short term cash management activities. The impact of foreign exchange translation also contributed to the decrease.

Interest-bearing deposits with banks increased $41 billion, primarily due to higher deposits with central banks, reflecting our short term cash and liquidity management activities.

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Securities, net of applicable allowance, were up $9 billion or 3%, mainly due to higher equity trading securities reflecting favourable market conditions and higher corporate debt securities, partially offset by the impact of foreign exchange translation and lower government securities.

Assets purchased under reverse repurchase agreements (reverse repos) and securities borrowed decreased $5 billion or 2%, largely due to the impact of foreign exchange translation and our liquidity management activities, partially offset by increased client demand.

Loans (net of Allowance for loan losses) were up $57 billion or 9%, largely due to volume growth in residential mortgages and wholesale loans. These factors were partially offset by the impact of foreign exchange translation.

Derivative assets were down $18 billion or 16%, mainly attributable to the impact of foreign exchange translation and lower fair values on interest rate contracts. These factors were partially offset by higher fair values on foreign exchange contracts.

Other assets were up $4 billion or 4%, largely reflecting higher commodity trading receivables and increased employee benefit assets. These factors were largely offset by the impact of foreign exchange translation.

Total liabilities increased $70 billion or 5% from last year. Foreign exchange translation decreased total liabilities by $68 billion.

Deposits increased $89 billion or 9%, mainly due to higher business and retail deposits driven by both higher liquidity maintained by our clients amidst the COVID-19 pandemic and higher client activity. Higher issuances of short-term notes also contributed to the increase. These factors were partially offset by the impact of foreign exchange translation.

Derivative liabilities were down $18 billion or 17%, mainly attributable to the impact of foreign exchange translation and lower fair values on interest rate contracts. These factors were partially offset by higher fair values on foreign exchange contracts.

Other liabilities remained flat as higher obligations related to securities sold short were fully offset by the impact of foreign exchange translation.

Total equity increased $12 billion or 14% primarily reflecting earnings, net of dividends.

Off-balance sheet arrangements

In the normal course of business, we engage in a variety of financial transactions that, for accounting purposes, are not recorded on our Consolidated Balance Sheets. Off-balance sheet transactions are generally undertaken for risk, capital and funding management purposes which benefit us and our clients. These include transactions with structured entities and may also include the issuance of guarantees. These transactions give rise to, among other risks, varying degrees of market, credit, liquidity and funding risk, which are discussed in the Risk management section.

We use structured entities to securitize our financial assets as well as assist our clients in securitizing their financial assets. These entities are not operating entities, typically have no employees, and may or may not be recorded on our Consolidated Balance Sheets.

In the normal course of business, we engage in a variety of financial transactions that may qualify for derecognition. We apply the derecognition rules to determine whether we have transferred substantially all the risks and rewards or control associated with the financial assets to a third party. If the transaction meets specific criteria, it may qualify for full or partial derecognition from our Consolidated Balance Sheets.

Securitizations of our financial assets

We periodically securitize our credit card receivables and residential and commercial mortgage loans primarily to diversify our funding sources, enhance our liquidity position and for capital purposes. We also securitize residential and commercial mortgage loans as part of our sales and trading activities.

We securitize our credit card receivables, on a revolving basis, through a consolidated structured entity. We securitize single and multiple-family residential mortgages through the National Housing Act Mortgage-Backed Securities (NHA MBS) program. The majority of our securitization activities are recorded on our Consolidated Balance Sheets as we do not meet the derecognition criteria. During 2021 and 2020, we did not derecognize any mortgages securitized through the NHA MBS program. For further details, refer to Note 6 and Note 7 of our 2021 Annual Consolidated Financial Statements.

We also periodically securitize commercial mortgage loans by selling them in collateral pools, which meet certain diversification, leverage and debt coverage criteria, to structured entities, one of which is sponsored by us. Securitized commercial mortgage loans are derecognized from our Consolidated Balance Sheets as we have transferred substantially all of the risks and rewards of ownership of the securitized assets. During the year ended October 31, 2021, we did not securitize any commercial mortgages (October 31, 2020 – $469 million). Our continuing involvement with the transferred assets is limited to servicing certain of the underlying commercial mortgages sold. As at October 31, 2021, there was $2 billion of commercial mortgages outstanding that we continue to service related to these securitization activities (October 31, 2020 – $2 billion).

Involvement with unconsolidated structured entities

In the normal course of business, we engage in a variety of financial transactions with structured entities to support our customers’ financing and investing needs, including securitization of our clients’ financial assets, creation of investment products, and other types of structured financing.

We have the ability to use credit mitigation tools such as third-party guarantees, credit default swaps, and collateral to mitigate risks assumed through securitization and re-securitization exposures. The process in place to monitor the credit quality of our securitization and re-securitization exposures involves, among other things, reviewing the performance data of the underlying assets. We affirm our ratings each quarter and formally confirm or assign a new rating at least annually. For further details on our activities to manage risks, refer to the Risk management section.

Below is a description of our activities with respect to certain significant unconsolidated structured entities. For a complete discussion of our interests in consolidated and unconsolidated structured entities, refer to Note 7 of our 2021 Annual Consolidated Financial Statements.

RBC-administered multi-seller conduits

We administer multi-seller conduits which are used primarily for the securitization of our clients’ financial assets. Our clients primarily use our multi-seller conduits to diversify their financing sources and to reduce funding costs by leveraging the value of high-quality collateral. The conduits offer us a favourable revenue stream and risk-adjusted return.

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We provide services such as transaction structuring, administration, backstop liquidity facilities and partial credit enhancements to the multi-seller conduits. Revenue for all such services amounted to $304 million during the year (October 31, 2020 – $277 million).

Our total commitment to the conduits in the form of backstop liquidity and credit enhancement facilities is shown below. The total committed amount of these facilities exceeds the total amount of the maximum assets that may have to be purchased by the conduits under the purchase agreements. As a result, the maximum exposure to loss attributable to our backstop liquidity and credit enhancement facilities is less than the total committed amounts of these facilities.

Liquidity and credit enhancement facilities											Table 38
	2021						2020
As at October 31 (Millions of Canadian dollars)	Notional of<br>committed<br>amounts<br>(1)		Allocable<br>notional<br>amounts		Maximum<br>exposure<br>to loss<br>(2)		Notional of<br>committed<br>amounts (1)		Allocable<br>notional<br>amounts		Maximum<br>exposure<br>to loss (2)
Backstop liquidity facilities	$	40,876	$	38,330	$	38,330	$	42,803	$	40,137	$ 40,137
Credit enhancement facilities <br>(3)		2,546		2,546		2,546		2,666		2,666	2,666
Total	$	43,422	$	40,876	$	40,876	$	45,469	$	42,803	$ 42,803
(1)	Based on total committed financing limit.
---	---
(2)	Not presented in the table above are derivative assets with a fair value of $17 million (October 31, 2020 – $60 million) which are a component of our total maximum exposure to loss from our interests in the multi-seller conduits. Refer to Note 7 of our 2021 Annual Consolidated Financial Statements for more details.
---	---
(3)	Includes $9 million (October 31, 2020 – $2 million) of Financial standby letters of credit.
---	---

As at October 31, 2021, the notional amount of backstop liquidity facilities we provide decreased by $1,927 million or 5% from last year, primarily due to the impact of foreign exchange translation. The notional amount of partial credit enhancement facilities we provide decreased by $120 million or 5% from last year, primarily due to the impact of foreign exchange translation.

Maximum exposure to loss by client type	Table 39
	2021			2020
---	---	---	---	---	---	---
As at October 31 (Millions of dollars)	US	C	Total C	US	C	Total C
Outstanding securitized assets
Auto and truck loans and leases
Consumer loans
Credit cards
Dealer floor plan receivables
Equipment receivables
Fleet finance receivables
Insurance premiums
Residential mortgages
Student loans
Trade receivables
Transportation finance
Total
Canadian equivalent

All values are in US Dollars.

Our overall exposure decreased by 5% compared to last year primarily due to the impact of foreign exchange translation. Correspondingly, total assets of the multi-seller conduits decreased by $1,890 million or 5% from last year. All of the multi-seller conduits assets were internally rated A or above. All transactions funded by the unconsolidated multi-seller conduits are internally rated using a rating system as outlined in the internal ratings map in the credit risk section.

Multiple independent debt rating agencies review all of the transactions in the multi-seller conduits. Transactions financed in the U.S. multi-seller conduits are reviewed by Moody’s Investors Service (Moody’s), Standard & Poor’s (S&P) and Fitch Ratings (Fitch). Transactions in two of the Canadian multi-seller conduits are reviewed by Dominion Bond Rating Service (DBRS) and Moody’s while one of the Canadian multi-seller conduits is also reviewed by S&P. Each applicable rating agency also reviews ongoing transaction performance on a monthly basis and may publish reports detailing portfolio and program information related to the conduits.

As at October 31, 2021, the total asset-backed commercial paper (ABCP) issued by the conduits amounted to $25 billion, an increase of $1,488 million or 6% from last year, primarily due to higher client usage. The rating agencies that rate the ABCP rated 100% (October 31, 2020 – 100%) of the total amount issued within the top ratings category.

Structured finance

We provide liquidity facilities to certain municipal bond Tender Option Bond (TOB) trusts in which we have an interest but do not consolidate because the residual certificates issued by the TOB trusts are held by third parties. As at October 31, 2021, our maximum exposure to loss from these unconsolidated municipal bond TOB trusts was $3 billion (October 31, 2020 – $3 billion).

We provide senior warehouse financing to unaffiliated structured entities that are established by third parties to acquire loans and issue term collateralized loan obligations (CLO). A portion of the proceeds from the sale of the term CLO is used to fully repay the senior warehouse financing that we provide. As at October 31, 2021, our maximum exposure to loss associated with the outstanding senior warehouse financing facilities was $951 million (October 31, 2020 – $88 million). The increase in our maximum exposure to loss from last year was driven by increased client utilization and the addition of new financing facilities.

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We provide senior financing to unaffiliated structured entities that are established by third parties to acquire loans. These facilities tend to be longer in term than the CLO warehouse facilities and benefit from credit enhancement designed to cover a multiple of historical losses. As at October 31, 2021, our maximum exposure to loss associated with the outstanding senior financing facilities was $4 billion (October 31, 2020 – $3 billion). The increase in our maximum exposure to loss from last year was driven by the addition of new financing facilities partially offset by the repayment and termination of existing financing facilities.

Investment funds

We invest in hedge funds primarily to provide clients with desired exposures to reference funds. As we make investments in the reference funds, exposures to the funds are simultaneously transferred to clients through derivative transactions. Our maximum exposure to loss in the reference funds is limited to our investments in the funds. As at October 31, 2021, our maximum exposure to loss was $3 billion (October 31, 2020 – $2 billion). The increase in our maximum exposure to loss from last year was due to increased holdings in third-party investment funds.

We also provide liquidity facilities to certain third-party investment funds. The funds issue unsecured variable-rate preferred shares and invest in portfolios of tax exempt bonds. As at October 31, 2021, our maximum exposure to loss on these funds was $606 million (October 31, 2020 – $278 million). The increase in our maximum exposure to loss from last year was driven by the addition of new financing facilities.

Third-party securitization vehicles

We hold interests in certain unconsolidated third-party securitization vehicles, which are structured entities. We, as well as other financial institutions, are obligated to provide funding to these entities up to our maximum commitment level and are exposed to credit losses on the underlying assets after various credit enhancements. As at October 31, 2021, our maximum exposure to loss in these entities was $12 billion (October 31, 2020 – $10 billion). The increase in our maximum exposure to loss compared to last year reflects an increase in client activity with third-party securitization vehicles partially offset by the impact of foreign exchange translation. Interest and non-interest income earned in respect of these investments was $89 million (October 31, 2020 – $112 million).

Guarantees, retail and commercial commitments

We provide our clients with guarantees and commitments that expose us to liquidity and funding risks. Our maximum potential amount of future payments in relation to our commitments and guarantee products as at October 31, 2021 amounted to $414 billion compared to $387 billion last year. The increase compared to last year was primarily driven by growth in securities lending indemnifications and other commitments to extend credit partly offset by decreases in back stop liquidity facilities and sponsored repo guarantees. Refer to Liquidity and funding risk and Note 23 of our 2021 Annual Consolidated Financial Statements for details regarding our guarantees and commitments.

Risk management

We are in the business of managing the risks inherent to the financial services industry as we aim to create maximum value for our shareholders, clients, employees and communities. The ability to manage risk is a core competency of the bank, and is supported by our risk-aware culture and risk management approach. Our view of risks is dynamic, and reflects the pace of change in the financial services industry.

Top and emerging risks

An important component of our risk management approach is to ensure that top and emerging risks, as they evolve, are identified, managed, and incorporated into our existing risk management assessment, measurement, monitoring and escalation processes and addressed in our risk frameworks and policies. These practices are intended to ensure a forward-looking risk assessment is maintained by management in the course of business development and as part of the execution of ongoing risk oversight responsibilities. Top and emerging risks are discussed by senior management and the Board on a regular basis.

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We have developed supplementary internal guidance to support enterprise-wide identification and assessment of all material risks, including those that are not readily apparent. Top and emerging risks encompass those that could materially impact our financial results, financial and operational resilience, reputation, business model, or strategy, as well as those that could potentially materially impact us as the risks evolve. In addition to the Impact of pandemic risk factor outlined in the Impact of COVID-19 pandemic section, the following represents our top and emerging risks:

Top & emerging risks	Description
Business and economic conditions<br> <br><br> <br>	Our financial results may be affected to varying degrees by the general business and economic conditions in the geographic regions in which we operate. These conditions may include factors such as consumer saving, spending habits and sentiment, as well as consumer borrowing and repayment patterns, unemployment rates, the differing paths to economic recovery among nations across the globe, particularly in light of the prolonged COVID-19 pandemic and range of containment measures, the level of business investment and overall business sentiment, the long-term impact from the pandemic on vulnerable sectors, the level of government spending as well as fiscal and monetary policy, the level of activity and volatility of the financial markets, supply chain challenges and labour shortages affecting certain sectors, and inflation or possible stagflation. Moreover, interest rate changes and actions taken by central banks to manage inflation or the broader economy would have implications for us. Our financial results are sensitive to changes in interest rates, as described in the Systemic risk section.<br> <br><br> <br>For example, a slowdown in economic growth or an economic downturn could adversely impact employment rates and household incomes, consumer spending, corporate earnings and business investment and could adversely affect our business, including but not limited to the demand for our loan and other products, and result in lower earnings, including higher credit losses. Additional risks are emerging around governments’ withdrawal of COVID-19 pandemic support measures, and how they will seek to recoup the unprecedented levels of support. This may include, for example, changes to tax policy to address fiscal capacity concerns and to balance budgets in the future.<br> <br><br> <br>There are also emerging risks related to changing demographics as well as the potential implications that a prolonged low interest rate environment will have, for example, on increasing wealth inequality and delayed retirement ages, among others.<br> <br><br> <br>For details on how we are managing our risks associated with the COVID-19 pandemic, refer to the Impact of pandemic risk factor in the Impact of COVID-19 pandemic section of this 2021 Annual Report.
Information technology and cyber risks<br> <br><br> <br>	Information technology (IT) and cyber risks remain top risks, not only for the financial services sector, but for other industries worldwide. We continue to be subject to heightened risks in the form of cyber-attacks, data breaches, cyber extortion and similar compromises, due to: (i) the size, scale, and global nature of our operations; (ii) our heavy reliance on the internet to conduct day-to-day business activities; (iii) our intricate technological infrastructure; and (iv) our use of third-party service providers. Additionally, clients’ use of personal devices can create further avenues for potential cyber-related incidents, as the bank has little or no control over the safety of these devices. Ransomware threats are growing in sophistication and being used to launch major supply chain attacks. IT and cyber risks have also increased during the COVID-19 pandemic, as increased malicious activities are creating more threats for cyberattacks including COVID-19 phishing emails, malware-embedded mobile apps that purport to track infection rates, and targeting of vulnerabilities in remote access platforms as companies continue to operate with work from home arrangements. Resulting implications could include business interruptions, service disruptions, financial loss, theft of intellectual property and confidential information, litigation, enhanced regulatory attention and penalties, as well as reputational damage. Furthermore, the adoption of emerging technologies, such as cloud computing, AI and robotics, call for continued focus and investment to manage risks effectively. For more details on how we are managing these risks, refer to the Operational risk section.
Environmental and<br>social risk<br>(including climate change)<br> <br><br> <br>	We, like other organizations, are increasingly under scrutiny to address social and racial inequality and human rights issues, and failure to do so may result in strategic, reputational and regulatory risks.<br> <br><br> <br>Risks associated with climate change are evolving as it relates to the global transition to a net-zero economy and physical climate risks (e.g., extreme weather events), which could result in a broad range of impacts including potential strategic, reputational, regulatory, compliance, operational and credit related risks for us and our clients. For details on how we are managing these risks, refer to the Overview of other risks section.
Digital disruption and innovation<br> <br><br> <br>	The COVID-19 pandemic has changed the way consumers interact with financial services providers. Demand for digital banking services has increased, and while this represents an opportunity for us to leverage our technological advantage, the need to meet the rapidly evolving needs of clients and compete with non-traditional competitors has increased our strategic and reputational risks. Additional risks also continue to emerge as demographic trends, evolving client expectations, the increased power to analyze data and the emergence of disruptors are creating competitive pressures across a number of sectors. Moreover, established technology companies, newer competitors, and regulatory changes continue to foster new business models that could challenge traditional banks and financial products. Finally, while the adoption of new technologies, such as AI and machine learning, presents opportunities for us, it could result in new and complex strategic, reputational, operational, regulatory and compliance risks that would need to be managed effectively.

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Top & emerging risks	Description
Canadian housing and household indebtedness<br> <br><br> <br>	Canadian housing and household indebtedness risks remain elevated, but have moderated as restrictions related to the COVID-19 pandemic have eased and employment has rebounded. However, the unemployment rate remains above pre-pandemic levels. Concerns related to housing affordability in certain markets and levels of mortgage-related Canadian household debt – which were already elevated before and during the COVID-19 pandemic – could escalate if additional waves of the COVID-19 pandemic emerge, if the period of economic recovery is prolonged, or if the lending environment changes, potentially resulting in, among other things, higher credit losses.<br> <br><br> <br>While real estate rental activity has rebounded in certain markets, changing consumer preferences and work arrangements, and the impact from possible future waves of the COVID-19 pandemic, may continue to have an impact on future real estate investment and demand.
Geopolitical uncertainty<br> <br><br> <br>	Persistent trade tensions, supply chain disruptions, policy changes, COVID-19 vaccine nationalism and vaccine diplomacy continue to impact global economic growth prospects and market sentiment. The Canadian economy is vulnerable to continued trade tensions given the country’s trading relationships with the U.S. and China. Tensions remain elevated between China and the U.S. and its allies over a number of issues, including trade, technology, human rights, Hong Kong, Macau, and Taiwan. Tensions between China and its neighbours over territorial claims add further global and economic uncertainty. In addition, tensions with Russia remain high over allegations of cyber-attacks, election interference, adventurism, and the mistreatment of anti-corruption and pro-democracy activists. Other geopolitical tensions could also add to economic and market uncertainties.<br> <br><br> <br>More broadly, the post-pandemic future of global trade remains uncertain, as countries look to decrease reliance on the global supply chain. Increased protectionism and economic nationalism could reshape global alliances as a steady COVID-19 vaccine supply and the supply of other critical goods of economic and national importance (e.g., semiconductors) remain one of the top priorities of governments. We will continue to monitor these developments and others, and will assess the implications they have on us.
Privacy, data and third-party<br> <br>related risks<br> <br><br> <br>	The protection and responsible use of personal information are critical to maintaining our clients’ trust. In addition, the management and governance of our data also remains a top risk given the high value attributed to our data for the insights it can generate for clients and communities. Resulting implications from failing to manage data and privacy risks could include financial loss, theft of intellectual property and/or confidential information, litigation, enhanced regulatory attention and penalties, as well as reputational damage. Effective privacy and information management practices continue to grow in importance, as demonstrated by the continued development of complex regulations in the jurisdictions in which we operate. Our potential exposure to these risks increases as we continue to partner with third-party service providers and adopting new business models and technologies (e.g., cloud computing, AI and machine learning). Attackers gravitate towards vulnerabilities in an ecosystem, and the weakest link in the supply chain can be a supplier or third-party service provider, who may not have sufficiently robust controls. Privacy, data and third-party related risks have been heightened as the use of work from home arrangements remains common practice. Third-party providers critical to our operations are monitored for any impact on their ability to deliver services, including vendors of our third-party providers. For details on how we are managing these risks, refer to the Operational risk section.
Regulatory changes<br> <br><br> <br>	The ongoing introduction of new or revised regulations will continue to lead to increasing focus across the organization on meeting additional regulatory requirements across the multiple jurisdictions in which we operate. Financial and other reforms that have or are coming into effect, across multiple jurisdictions, such as anti-money laundering regulations, interest rate benchmark reform, as well as privacy, climate and consumer protection, continue to impact our operations and strategies. For more details, refer to the Legal and regulatory environment risk section.
Culture and conduct risks<br> <br><br> <br>	Our purpose, values and risk principles are key dimensions of our culture. We demonstrate our culture through our conduct – the behaviours, judgments, decisions, and actions of the organization and our employees. Culture and conduct risks are considered top risks for the financial services industry due to the impact our choices, behaviours, and overall risk governance can have on outcomes for our stakeholders. We embed client considerations into our decision-making processes and aim to focus on the fair treatment of clients, and continue to implement regulatory changes that align with this objective. We are responsive to evolving employee needs while expecting employees to always act with integrity.<br> <br><br> <br>Canadian, U.S. and global regulators have been increasingly focused on conduct matters and risks, and heightened expectations generally from regulators could lead to investigations, remediation requirements, and higher compliance costs. While we take steps to continue to strengthen our conduct practices, and prevent and detect outcomes which could potentially harm clients, employees or the integrity of the markets, such outcomes may not always be prevented or detected. For more details, refer to the Culture and conduct risk section.

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Overview

As a global financial institution with a diversified business model, we actively manage a variety of risks to help protect and enable our businesses by following these risk management principles:

Risk management principles

•	Effectively balance risk and reward to enable sustainable growth.
•	Collectively share the responsibility for risk management.
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•	Undertake only risks we understand and make thoughtful and future-focused risk decisions.
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•	Always uphold our Purpose and Vision, and consistently abide by our Values and Code of Conduct to maintain our reputation and the trust of our clients, colleagues and communities.
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•	Maintain a healthy and robust control environment to protect our stakeholders.
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•	Use judgment and common sense.
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•	Always be operationally prepared and financially resilient for a potential crisis.
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The dynamic nature of the financial services industry, and technological innovation, necessitate that our processes, tools and practices are continuously improving and responding to the changing landscape and emerging risks. We seek to accomplish this through an effective and evolving risk management approach. All risk-taking activities and exposures are within the Board-approved risk appetite, and corresponding capital and liquidity requirements. We seek to ensure that our business activities and transactions provide an appropriate balance of return for the risks assumed and the costs incurred. Our organizational design and governance processes are intended to ensure that our Group Risk Management (GRM) function is independent from the businesses it supports.

Risk drivers

We define risk as the potential vulnerabilities in the short-, medium- or long-term that may impact our financial results, financial and operational resilience, reputation, business model, or strategy. Risk can be realized through losses, or an undesirable outcome with respect to volatility of earnings in relation to expected earnings, capital adequacy, or liquidity. Our principal risks include credit, market, liquidity, insurance, operational, regulatory compliance, strategic, reputation, legal and regulatory environment, competitive, and systemic risks, that have been classified into four categories based on the level of control and influence that we can exert against these risks. These categories are maintained by GRM and reviewed regularly to ensure all principal risks are reflected. This classification methodology provides a common language and discipline for the identification and assessment of risk in existing businesses, new businesses, products or initiatives, as well as acquisitions and alliances.

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Enterprise risk management

Under the oversight of the Board and senior management, the Enterprise Risk Management Framework (ERMF) provides an overview of our enterprise-wide programs for managing risk, including identifying, assessing, measuring, controlling, monitoring and reporting on the significant risks that face the organization.

Risk governance

We have an effective and well-established governance framework in place to ensure that risks impacting our businesses are identified, appropriately categorized, assessed, managed and communicated to the Board in a timely manner. The risk governance framework has been established, and is maintained in alignment with, the expectations of OSFI, the Basel Committee on Banking Supervision’s (BCBS) corporative governance principles, and the requirements and expectations of other regulators in the jurisdictions and businesses in which we conduct business, and in accordance with industry best practices. The Board oversees the implementation of our risk management framework, while employees at all levels of the organization are responsible for managing the day-to-day risks that arise in the context of their mandates. As illustrated below, we use the three lines of defence governance model which is intended to ensure that risks are appropriately and adequately managed throughout the enterprise to achieve our strategic objectives.

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Risk appetite

Effective risk management protects us from unacceptable losses or undesirable outcomes with respect to earnings volatility, capital adequacy or liquidity, reputation risk or other risks while supporting and enabling our overall business strategy. It requires the clear articulation of our risk appetite, which is the amount and type of risk that we are able and willing to accept in the pursuit of our business objectives. It reflects our self-imposed upper bound to risk-taking, set at levels inside of regulatory limits and constraints, and influences our risk management philosophy, Code of Conduct, business practices and resource allocation. It provides clear boundaries and sets an overall tone for balancing risk-reward trade-offs to ensure the long-term viability of the organization.<br><br>Our risk appetite is integrated into our strategic, financial, and capital planning processes, as well as ongoing business decision-making processes and is reviewed and approved annually by the Board.<br><br>Our Enterprise Risk Appetite Framework (ERAF) outlines the foundational aspects of our approach to risk appetite, articulates our quantitative and qualitative risk appetite statements and their supporting measures and associated constraints, which can be applied at the enterprise, business segment, business unit and legal entity level, and describes our requirements and exp<br>e<br>ctations to embed effective risk appetite practices throughout the organization.
Risk appetite statements
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Quantitative statements	Qualitative statements
• Manage earnings volatility and exposure to future losses under normal and stressed conditions.<br><br>• Avoid excessive concentrations of risk.<br><br>• Ensure capital adequacy and sound management of liquidity and funding risk.<br><br>• Ensure sound management of operational and regulatory compliance risk.<br><br>• Maintain strong credit ratings and a risk profile in the top half of our peer group.	• Always uphold our Purpose and Vision and consistently abide by our Values and Code of Conduct to maintain our reputation and the trust of our clients, colleagues, and communities.<br><br>• Undertake only risk we understand. Make thoughtful and future-focused risk decisions, taking environmental and social considerations into account.<br><br>• Effectively balance risk and reward to enable sustainable growth.<br><br>• Maintain a healthy and robust control environment to protect our stakeholders.<br><br>• Always be operationally prepared and financially resilient for a potential crisis.

The allocation of our risk appetite across the bank is supported by the establishment of delegated authorities or risk limits. These delegated authorities or risk limits represent the maximum level of risk permitted for a line of business, portfolio, individual or group and are used to govern ongoing operations. Risk posture, the anticipated shift in risk profile as a result of changes in objectives, strategies, and external factors, is used to provide insights on key areas that may require management attention to ensure strategies are able to be executed successfully within our risk appetite.

Risk measurement

Quantifying risk is a key component of our enterprise-wide risk and capital management processes. Risk measurement and planning processes are integrated across the enterprise, especially in regards to forward-looking projections and analyses, including but not limited to, stress testing, recovery and resolution planning, and credit provisioning. The degree of integration across our Finance and Risk functions continues to increase in measuring both financial and risk performance.

Certain risks, such as credit, market, liquidity and insurance risks, can be more easily quantified than others, such as operational, reputation, strategic, legal, and regulatory compliance risks. For the risks that are more difficult to quantify, greater emphasis is placed on qualitative risk factors and assessment of activities to gauge the overall level of risk. In addition, judgmental risk measures and techniques such as stress testing, and scenario and sensitivity analyses can be used to assess and measure risks, and we are continuously evolving our risk measures and techniques to manage our risks. Our primary methods for measuring risk include:

•	Quantifying expected loss: losses that are statistically expected to occur as a result of conducting business in a given time period;
•	Quantifying unexpected loss: an estimate of the deviation of actual earnings from expected earnings, over a specified time horizon;
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•	Stress testing: evaluates, from a forward looking perspective, the potential effects of a set of specified changes in risk factors, corresponding to exceptional but plausible adverse economic and financial market events; and
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•	Back-testing: the realized values are compared to the parameter estimates that are currently used in an effort to ensure the parameters remain appropriate for regulatory and economic capital calculations.
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Stress testing

Stress testing is an important component of our risk management framework. Stress testing results are used for:

•	Assessing the viability of long-term business plans and strategies;
•	Monitoring our risk profile relative to our risk appetite in terms of earnings and capital at risk;
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•	Setting limits;
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•	Identifying key risks to, and potential shifts in, our capital and liquidity levels, as well as our financial position;
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•	Enhancing our understanding of available mitigating actions in response to potential adverse events; and
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•	Assessing the adequacy of our capital and liquidity levels.
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Our enterprise-wide stress tests evaluate key balance sheet, income statement, leverage, capital, and liquidity impacts arising from risk exposures and changes in earnings. The results are used by the Board, Group Risk Committee (GRC) and senior management risk committees to understand our performance drivers under stress, and review stressed capital, leverage, and liquidity ratios against regulatory thresholds and internal limits. The results are also incorporated into our Internal Capital Adequacy Assessment Process (ICAAP) and capital plan analyses.

We evaluate a number of enterprise-wide stress scenarios over a multi-year horizon, featuring a range of severities. Our Board reviews the recommended scenarios, and GRM leads the scenario assessment process. Results from across the organization are integrated to develop an enterprise-wide view of the impacts, with input from subject matter experts in GRM, Corporate Treasury, Finance, and Economics. Generally, our stress testing scenarios evaluate global recessions, equity market corrections, elevated debt levels, trade policies, changes in interest rates, real estate price corrections, and shocks to credit spreads and commodity markets, among other factors. During our fiscal 2021 stress testing exercises, we addressed several emerging risks inclusive of further waves of the COVID-19 pandemic, inflation risk as well as physical and transitional climate risk, with a focus on the impacts of these risks on revenue, net income and capital projections.

Ongoing stress testing and scenario analyses within specific risk types, such as market risk (including Interest Rate Risk in the Banking Book (IRRBB)), liquidity risk, retail and wholesale credit risk, operational risk, and insurance risk, supplement and support our enterprise-wide analyses. Results from these risk-specific programs are used in a variety of decision-making processes including risk limit setting, portfolio composition evaluation, risk appetite articulation and business strategy implementation.

In addition to ongoing enterprise-wide and risk specific stress testing programs, we use ad hoc and reverse stress testing to deepen our knowledge of the risks we face. Ad hoc stress tests are one-off analyses used to investigate developing conditions or to stress a particular portfolio in more depth. Reverse stress tests, starting with a severe outcome and aiming to reverse-engineer scenarios that might lead to it, are used in risk identification and understanding of risk/return boundaries.

In addition to internal stress tests, we participate in a number of regulator-required stress test exercises, on a periodic basis, across several jurisdictions.

Model governance and validation

Quantitative models are used for many purposes including, but not limited to, the valuation of financial products, the identification, measurement and management of different types of risk, stress testing, assessing capital adequacy, informing business and risk decisions, measuring compliance with internal limits, meeting financial reporting and regulatory requirements, and issuing public disclosures.

Model risk is the risk of adverse financial and/or reputational consequences to the enterprise arising from the use or misuse of a model at any stage throughout its life cycle and is managed through our model risk governance and oversight structure. The governance and oversight structure, which is implemented through our three lines of defence governance model, is founded on the basis that model risk management is a shared responsibility across the three lines spanning all stages of the model’s life cycle. We continue to evolve our governance model to take into account any new risk considerations that may emerge from the growing use of Artificial Intelligence (AI) methods and applications in our models across our organization.

Prior to being used, models are subject to an independent validation and approval by our enterprise model risk management function, a team of modelling professionals with reporting lines independent of those of the model owners, developers and users. The validation seeks to ensure that models are sound and capable of fulfilling their intended use. In addition to independently validating models prior to use, our enterprise model risk management function provides controls that span the life-cycle of a model, including model change management procedures, requirements for ongoing monitoring, and annual assessments to ensure each model continues to serve its intended purpose.

Risk control

Our enterprise-wide risk management approach is supported by a comprehensive set of risk controls that are defined in our ERMF. The ERMF serves as the foundation for our approach to risk management and sets the expectations for the development and communication of policies, the establishment of formal independent risk review and approval processes, and the establishment of delegated authorities and risk limits. The ERMF is further reinforced and supported by a number of additional Board-approved risk frameworks, various policies thereunder and a comprehensive set of risk controls. Together, our risk frameworks and supporting policies provide direction and insight on how respective risks are identified, assessed, measured, managed, mitigated, monitored and reported. The enterprise-wide policies are considered our minimum requirements, articulating the parameters within which business groups and employees must operate.

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Delegated authorities and risk limits

Risk appetite is designed to account for strategic and forward-looking considerations whereas authorities and risk limits are used to govern and monitor our day-to-day business activities. Risk Appetite is supported by Risk Approval Authorities delegated by the Board to senior management which provide thresholds for escalation of exposures and transactions to the Risk Committee of the Board for review and approval. The allocation of Risk Appetite and Board Delegated Authorities may be supported by the establishment of management delegated authorities and/or risk limits. These represent the maximum level of risk permitted for a line of business, portfolio, individual or other group, and are used to implement risk management strategies and govern ongoing operations. Senior management can then delegate some or all of their authorities onwards to others in the organization. The delegated authorities enable the approval of single name, geographic and industry sectors, and product and portfolio exposures within defined parameters and limits. They are also used to manage concentration risk, establish underwriting and inventory limits for trading and investment banking activities and set market risk tolerances.

Risk review and approval processes

Risk review and approval processes provide an important control mechanism and are established by GRM based on the nature, size and complexity of the risk involved. In general, the risk review and approval process involves a formal review and approval by an individual, group or committee that is independent from the originator. The approval responsibilities are governed by delegated authorities and risk limits are based on the following categories: transactions, projects and initiatives, and new products and services.

Risk monitoring and reporting

Enterprise and business segment level risk monitoring and internal reporting are critical components of our enterprise risk management program and support the ability of senior management and the Board to effectively perform their risk management and oversight responsibilities. In addition, we publish a number of external reports on risk matters to comply with regulatory requirements. The Risk Committee of the Board receives a CRO report at each meeting that has been reviewed by senior management, and which includes, among others, top and emerging risks, industry trends or other notable items. On a quarterly basis, we provide our Enterprise Risk Report to senior management and the Risk Committee of the Board which includes, among others, top and emerging risks, risk profile relative to our risk appetite, portfolio quality metrics and a range of risks we face along with an analysis of the related issues, key trends and, when required, management actions. On an annual basis, we provide a benchmarking review to the Board which compares our performance to peers across a variety of risk metrics and includes a composite risk scorecard which provides an objective measure of our ranking relative to the peer group. In addition to our regular risk monitoring, other risk specific presentations are provided to, and discussed with, senior management and the Board on top and emerging risks or changes in our risk profile.

Culture and conduct risk

Our values set the tone of our organizational culture and translate into desired behaviours as articulated in our Code of Conduct and leadership model. We define conduct as the manifestation of culture through the behaviours, judgment, decisions, and actions of the organization and its individuals. Our organizational direction establishes the expectation of good conduct outcomes as the operating norm for the organization, all employees, and third-party service providers operating on our behalf to drive positive outcomes for our clients, employees, stakeholders, financial markets and our reputation. We hold ourselves to the

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highest standards of conduct to build the trust of our clients, investors, colleagues and community. The desired outcomes from effective culture and conduct practices align with our purpose and values and support our risk appetite statements.

Risk culture is a subset of our overall culture that influences how, individually and collectively, we take and manage risks. Our risk culture helps us identify and understand risks, openly discuss risks, and act on the organization’s current and perceived future risks. Our risk culture practices are grounded in our existing risk management and human resource disciplines and protocols. When combined with the elements of effective leadership and values, these practices provide a base from which the resulting risk culture and conduct can be assessed, monitored, sustained and subjected to ongoing enhancement.

Our Board-approved Enterprise Culture and Conduct Risks Framework provides organizational direction and describes our approach to a set of related topics applicable to all risk categories such as fair outcomes for clients and other stakeholders, culture, including accountability and risk culture, conduct risk, sales conduct and client practices, and misconduct.

On a regular basis, management communicates behavioural expectations to our employees with an emphasis on conduct and values. Our leadership model also supports and encourages effective challenge between the businesses and control functions. These behavioural expectations are supported by tools and resources which are designed to help employees live our values, report misconduct and raise concerns, including those that might have ethical implications. We are committed to fostering an environment where employees feel safe to speak up without retaliation. Employees have the ability to report matters through a global anonymous Conduct Hotline. In addition, our Code of Conduct outlines an employee’s responsibility to be truthful, respect others, and comply with laws, regulations and our policies. Anyone who breaches or fails to report an actual or possible breach of the Code of Conduct is subject to corrective or disciplinary action. This can range from reprimands and impacts on performance ratings and compensation, to termination of employment relationships with the organization.

The shaded text along with the tables specifically marked with an asterisk (*) in the following sections of the MD&A represent our disclosures on credit, market and liquidity and funding risks in accordance with IFRS 7, <br>Financial Instruments: Disclosures<br>, and include discussion on how we measure our risks and the objectives, policies and methodologies for managing these risks. Therefore, these shaded text and marked tables represent an integral part of our 2021 Annual Consolidated Financial Statements.
Transactional/positional risk drivers
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Credit risk
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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.

The responsibility for managing credit risk is shared broadly following the three lines of defence governance model. The Board delegates credit risk approval authorities through risk appetites to the President & CEO and CRO. Credit transactions in excess of these authorities must be approved by the Risk Committee of the Board. To facilitate day-to-day business activities, the CRO has been empowered to further delegate credit risk approval authorities to individuals within GRM, the business segments, and functional units as necessary.

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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;
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•	Using our credit risk rating and scoring systems or other approved credit risk assessment or rating methodologies, policies and tools;
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•	Pricing appropriately for the credit risk taken;
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•	Detecting and preventing inappropriate credit risk through effective systems and controls;
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•	Applying consistent credit risk exposure measurements;
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•	Ongoing credit risk monitoring and administration;
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•	Transferring credit risk to third parties where appropriate through approved credit risk mitigation techniques (e.g., sale, hedging, insurance, securitization); and
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•	Avoiding activities that are inconsistent with our values, Code of Conduct or policies.
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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 high net worth 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.
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•	Loss given default (LGD): An estimated percentage of EAD that is not expected to be recovered during the collections and recovery process.
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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.

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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.
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•	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.
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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 8 of our 2021 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.

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Internal ratings map*	Table 40
	PD Bands
---	---	---	---	---	---	---
Ratings	Business and Bank	Sovereign	BRR	S&P	Moody’s	Description
1	0.0000% – 0.0300%	0.0000% – 0.0150%	1+	AAA	Aaa	Investment Grade
2	0.0000% – 0.0300%	0.0151% – 0.0250%	1H	AA+	Aa1
3	0.0000% – 0.0350%	0.0251% – 0.0350%	1M	AA	Aa2
4	0.0351% – 0.0450%		1L	AA-	Aa3
5	0.0451% – 0.0550%		2+H	A+	A1
6	0.0551% – 0.0650%		2+M	A	A2
7	0.0651% – 0.0750%		2+L	A-	A3
8	0.0751% – 0.0850%		2H	BBB+	Baa1
9	0.0851% – 0.1000%		2M	BBB	Baa2
10	0.1001% – 0.1770%		2L	BBB-	Baa3
11	0.1771% – 0.3705%		2-H	BB+	Ba1	Non-investment Grade
12	0.3706% – 0.7065%		2-M	BB	Ba2
13	0.7066% – 1.1600%		2-L	BB-	Ba3
14	1.1601% – 1.6810%		3+H	B+	B1
15	1.6811% – 2.3490%		3+M	B	B2
16	2.3491% – 4.4040%		3+L	B-	B3
17	4.4041% – 7.0010%		3H	CCC+	Caa1
18	7.0011% – 13.1760%		3M	CCC	Caa2
19	13.1761% – 24.9670%		3L	CCC-	Caa3
20	24.9671% – 99.9990%		4	CC	Ca
21	100%		5	D	C	Impaired
22	100%		6	D	C
*	This table represents an integral part of our 2021 Annual Consolidated Financial Statements.
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Counterparty credit risk

Counterparty credit risk is the risk that a party with whom the bank has entered into a financial or non-financial contract will fail to fulfill its contractual agreement and default on its obligation. It incorporates not only the contract’s current value, but also considers how that value can move as market conditions change. Counterparty credit risk usually arises from trading-related derivative and repo-style transactions. Derivative transactions include forwards, futures, swaps and options, and can have underlying references that are either financial (e.g., interest rate, foreign exchange, credit, or equity) or non-financial (e.g., precious metal and commodities). For further details on our derivative instruments and credit risk mitigation, refer to Note 8 of our 2021 Annual Consolidated Financial Statements.

Trading counterparty credit activities are undertaken in a manner consistent with the relevant requirements under the ECRMF and the Enterprise Market Risk Management Framework (EMRMF), in line with our credit risk management policy documents and with approval in accordance with the appropriate delegated authorities .

The primary risk mitigation techniques for trading counterparty credit risk are close-out netting and collateralization. Close-out netting considers the net value of contractual obligations between counterparties in a default situation, thereby reducing overall credit exposure. Collateralization is when a borrower pledges assets as security, which provides recourse to the lender in the event of default. The policies that we maintain in relation to the recognition of risk mitigation from these techniques incorporate such considerations as:

•	The use of standardized agreements such as the International Swaps and Derivatives Association Master Agreement and Credit Support Annex;
•	Restricting eligible collateral to high quality liquid assets, primarily cash and highly-rated government securities, subject to appropriate haircuts; and
---	---
•	The use of initial margin and variation margin arrangements in accordance with regulatory requirements and internal risk standards.
---	---

Similarly, for securities finance and repurchase trading activity we mitigate counterparty credit risk via the use of standardized securities finance agreements, and by taking collateral generally in the form of eligible liquid securities.

We also mitigate counterparty credit risk through the use of central counterparties (CCPs). These highly-regulated entities intermediate trades between participating bilateral counterparties and mitigate credit risk through the use of initial and variation margin and the ability to net offsetting trades amongst participants. The specific structure and capitalization, including contingent capital arrangements, of individual CCPs are analyzed as part of assigning an internal counterparty credit risk rating and determining appropriate counterparty credit risk limits.

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Wrong-way risk

Wrong-way risk is the risk that exposure to a counterparty is adversely correlated with the credit quality of that counterparty. There are two types of wrong-way risk:

•

Specific wrong-way risk, which exists when our exposure to a particular counterparty is positively correlated with the PD of the counterparty due to the nature of our transactions with them (e.g., loans collateralized by shares or debt issued by the counterparty or a related party). Specific wrong-way risk over-the-counter (OTC) derivative trades are done on an exception basis only, and are permitted only when explicitly pre-approved by GRM. Factors considered in reviewing such trades include the credit quality of the counterparty, the nature of the asset(s) underlying the derivative and the existence of credit mitigation.

•

General wrong-way risk, which exists when there is a positive correlation between the PD of the counterparties and general macroeconomic or market factors. This typically occurs with derivatives (e.g., the size of the exposure increases) or with collateralized transactions (e.g., the value of the collateral declines). We monitor general wrong-way counterparty credit risk using a variety of metrics including stress scenarios, investment strategy concentration, the ability of counterparties to generate cash and liquidity, liquidity of the collateral and terms of financing.

---

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 41
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 2021 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.<br><br><br><br>Structuring of transactions<br><br>Specific credit policies and procedures set out the requirements for structuring transactions. Risk mitigants include the use of guarantees, collateral, seniority, loan-to-value (LTV) requirements and covenants. Product-specific guidelines set out appropriate product structuring as well as client and guarantor criteria.<br><br><br><br>Collateral<br><br>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.<br><br>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.<br><br>• 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.<br><br>• 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.
---

64 Royal Bank of Canada: Annual Report 2021 Management’s Discussion and Analysis

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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.

Credit risk administration

Loan forbearance

In our overall management of borrower relationships, e conomic or legal reasons may necessitate forbearance to certain clients with respect to the original terms and conditions of their loans. We have specialized groups and formalized policies that direct the management of delinquent or defaulted borrowers. We strive to identify borrowers in financial difficulty early and modify their loan terms to maximize collection and to avoid foreclosure, repossession, or other legal remedies. In these circumstances, a borrower may be granted concessions that would not otherwise be considered. Examples of such concessions to retail borrowers may include rate reduction, payment deferral, principal forgiveness and term extensions. Concessions to wholesale borrowers may include payment deferral, restructuring the agreements, modifying the original terms of the agreement and/or relaxation of covenants. For both retail and wholesale loans, the appropriate remediation techniques are based on the individual borrower’s situation, our policy and the customer’s willingness and capacity to meet the new arrangement.

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Credit risk exposure by portfolio, sector and geography

The following table presents our credit risk exposures under the Basel regulatory defined classes and reflects EAD. The classification of our sectors aligns with our view of credit risk by industry.

Credit risk exposure by portfolio, sector and geography	Table 42
	As at
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
	October 31<br> <br>2021														October 31<br> <br>2020
	Credit risk<br>(1), (2)								Counterparty credit risk<br>(3)						Credit risk (1)						Counterparty credit risk (3)
(Millions of Canadian dollars)	On-balance<br> <br>sheet amount			Off-balance<br> sheet<br> <br>amount<br>(4)					Repo-style<br>transactions		Derivatives		Total<br> <br>exposure		On-balance<br> <br>sheet amount		Off-balance<br> sheet<br>amount (4)				Repo-style<br>transactions		Derivatives		Total<br> <br>exposure
			Undrawn			Other<br>(5)				Undrawn						Other (5)
Retail
Residential secured (6)	$	362,793		$	96,609		$	–	$	–	$	–	$	459,402	$	338,653	$	88,728	$	–	$	–	$	–	$	427,381
Qualifying revolving (7)		30,080			90,932			–		–		–		121,012		24,328		67,779		–		–		–		92,107
Other retail		85,362			19,422			146		–		–		104,930		68,325		14,183		67		–		–		82,575
Total retail	$	478,235		$	206,963		$	146	$	–	$	–	$	685,344	$	431,306	$	170,690	$	67	$	–	$	–	$	602,063
Wholesale<br>(8)
Agriculture	$	9,400		$	1,756		$	30	$	–	$	84	$	11,270	$	9,562	$	1,854	$	34	$	–	$	108	$	11,558
Automotive		6,288			9,184			173		–		1,124		16,769		8,464		7,564		289		–		791		17,108
Banking		37,053			4,545			765		117,996		30,888		191,247		47,547		5,136		648		95,412		26,069		174,812
Consumer discretionary		14,792			9,380			573		–		698		25,443		15,119		9,282		509		–		649		25,559
Consumer staples		6,254			6,949			180		–		1,058		14,441		6,303		6,945		538		–		1,252		15,038
Oil and gas		5,678			10,328			1,474		–		7,493		24,973		7,805		10,779		1,600		–		2,492		22,676
Financial services		32,977			19,252			2,623		64,593		16,262		135,707		24,623		18,664		3,171		57,105		14,984		118,547
Financing products		11,277			2,405			485		388		848		15,403		3,755		1,098		522		90		1,055		6,520
Forest products		969			991			201		–		17		2,178		1,170		851		125		–		41		2,187
Governments		293,250			4,794			1,533		23,536		5,692		328,805		245,204		4,727		1,624		43,806		6,963		302,324
Industrial products		7,308			8,933			594		–		811		17,646		7,285		9,398		723		–		801		18,207
Information technology		3,591			5,715			237		49		5,447		15,039		4,626		5,065		257		13		3,898		13,859
Investments		22,238			3,201			412		12		174		26,037		17,518		2,969		437		13		230		21,167
Mining and metals		993			3,730			952		–		237		5,912		1,692		3,930		979		–		338		6,939
Public works and infrastructure		1,427			1,963			391		–		239		4,020		1,369		2,007		340		–		239		3,955
Real estate and related		76,141			14,223			1,568		–		1,176		93,108		69,949		13,712		1,573		–		1,180		86,414
Other services		23,872			13,362			1,860		47		1,316		40,457		25,570		12,289		1,336		5		1,857		41,057
Telecommunication and media		5,294			9,748			598		–		1,976		17,616		5,104		7,444		83		–		1,752		14,383
Transportation		6,151			6,832			1,319		–		1,426		15,728		7,516		5,612		1,533		–		1,714		16,375
Utilities		9,059			17,152			4,131		–		4,464		34,806		8,745		18,705		3,849		–		3,852		35,151
Other sectors		3,084			1,139			7		7		6,960		11,197		1,699		647		1		17		9,291		11,655
Total wholesale	$	577,096		$	155,582		$	20,106	$	206,628	$	88,390	$	1,047,802	$	520,625	$	148,678	$	20,171	$	196,461	$	79,556	$	965,491
Total exposure<br>(9)	$	1,055,331		$	362,545		$	20,252	$	206,628	$	88,390	$	1,733,146	$	951,931	$	319,368	$	20,238	$	196,461	$	79,556	$	1,567,554
By geography<br>(8), (10)
Canada	$	693,700		$	264,708		$	9,141	$	88,523	$	27,978	$	1,084,050	$	655,560	$	227,837	$	9,595	$	84,761	$	27,044	$	1,004,797
U.S.		245,929			69,295			7,866		54,617		27,270		404,977		199,705		63,423		6,404		41,938		23,142		334,612
Europe		62,509			22,667			1,991		42,483		25,757		155,407		50,940		21,158		2,312		43,754		22,429		140,593
Other International		53,193			5,875			1,254		21,005		7,385		88,712		45,726		6,950		1,927		26,008		6,941		87,552
Total exposure<br>(9)	$	1,055,331		$	362,545		$	20,252	$	206,628	$	88,390	$	1,733,146	$	951,931	$	319,368	$	20,238	$	196,461	$	79,556	$	1,567,554
(1)	EAD for standardized exposures are reported net of allowance for impaired assets and EAD for IRB exposures are reported gross of all allowance for credit losses and partial write-offs as per regulatory definitions.
---	---
(2)	Commencing Q2 2021, certain exposures are now classified as Retail – Small business and were previously classified as Wholesale, reflecting an alignment with capital measurement and reporting.
---	---
(3)	Counterparty credit risk EAD reflects exposure amounts after netting. Collateral is included in EAD for repo-style transactions to the extent allowed by regulatory guidelines. Exchange traded derivatives are included in Other sectors.
---	---
(4)	EAD for undrawn credit commitments and other off-balance sheet amounts are reported after the application of credit conversion factors.
---	---
(5)	Includes other off-balance sheet exposures such as letters of credit and guarantees.
---	---
(6)	Includes residential mortgages and home equity lines of credit.
---	---
(7)	Includes credit cards, unsecured lines of credit and overdraft protection products. Beginning Q1 2021, we have prospectively implemented the transitional methodology changes to the securitization framework under the Capital Adequacy Requirement (CAR) guidelines, which increased undrawn and drawn exposures.
---	---
(8)	Certain amounts by sector and geography have been revised from those previously presented.
---	---
(9)	Excludes securitization, banking book equities and other assets not subject to the standardized or IRB approach as well as exposures from the Paycheck Protection Program (PPP) instituted by the U.S. government in Q2 2020. For further details on the PPP, refer to the Impact of COVID-19 pandemic section.
---	---
(10)	Geographic profile is based on country of residence of the borrower.
---	---

2021 vs. 2020

Total credit risk exposure increased $166 billion or 11% from last year, primarily due to volume growth in loans and acceptances in our retail and wholesale portfolios, higher deposits with central banks, an increase in derivatives exposure, and higher repo-style transactions, partially offset by the impact of foreign exchange translation.

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Net European exposure by country and client type<br><br>(1), (2)	Table 43
	As at
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
	October 31<br> <br>2021																October 31<br> <br>2020 <br>(3)
	Asset type								Client type
(Millions of Canadian dollars)	Loans<br>Outstanding		Securities<br> (4)		Repo-style<br>transactions		Derivatives		Financials		Sovereign		Corporate		Total		Total
U.K.	$	10,128	$	20,462	$	652	$	2,833	$	12,025	$	11,494	$	10,556	$	34,075	$	26,920
Germany		1,582		7,515		24		214		5,012		2,382		1,941		9,335		9,811
France		1,505		3,222		40		407		1,981		2,207		986		5,174		4,629
Total U.K., Germany, France		13,215		31,199		716		3,454		19,018		16,083		13,483		48,584		41,360
Ireland		1,098		861		433		37		941		–		1,488		2,429		1,390
Italy		94		328		–		10		159		83		190		432		273
Portugal		1		11		–		–		10		–		2		12		20
Spain		343		251		16		4		177		–		437		614		542
Total peripheral		1,536		1,451		449		51		1,287		83		2,117		3,487		2,225
Luxembourg		3,567		4,497		27		45		2,532		3,867		1,737		8,136		9,724
Netherlands		872		847		62		244		807		–		1,218		2,025		2,534
Norway		166		1,358		118		16		1,296		142		220		1,658		1,568
Sweden		425		1,666		9		14		826		1,074		214		2,114		1,874
Switzerland		948		10,557		235		86		888		10,147		791		11,826		6,466
Other		3,251		2,661		112		114		1,727		1,493		2,918		6,138		4,443
Total other Europe		9,229		21,586		563		519		8,076		16,723		7,098		31,897		26,609
Net exposure to Europe<br><br>(5), (6)	$	23,980	$	54,236	$	1,728	$	4,024	$	28,381	$	32,889	$	22,698	$	83,968	$	70,194
(1)	Geographic profile is based on country of risk, which reflects our assessment of the geographic risk associated with a given exposure. Typically, this is the residence of the borrower.
---	---
(2)	Exposures are calculated on a fair value basis and net of collateral, which includes $164 billion against repo-style transactions (October 31, 2020 – $138 billion) and $9 billion against derivatives (October 31, 2020 – $14 billion).
---	---
(3)	Amounts have been revised from those previously presented.
---	---
(4)	Securities include $12 billion of trading securities (October 31, 2020 – $9 billion), $29 billion of deposits (October 31, 2020 – $19 billion), and $13 billion of investment securities (October 31, 2020 – $13 billion). Trading and investment securities amounts have been revised from those previously presented.
---	---
(5)	Excludes $2 billion (October 31, 2020 – $3 billion) of exposures to supranational agencies, predominantly in Luxembourg.
---	---
(6)	Reflects $1 billion of mitigation through credit default swaps, which are largely used to hedge single name exposures and market risk (October 31, 2020 – $1 billion).
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Residential mortgages and home equity lines of credit (insured vs. uninsured)

Residential mortgages and home equity lines of credit are secured by residential properties. The following table presents a breakdown by geographic region.

Residential mortgages and home equity lines of credit	Table 44
	As at October 31, 2021
---	---	---	---	---	---	---	---	---	---	---	---	---
(Millions of Canadian dollars,<br> <br>except percentage amounts)	Residential mortgages										Home equity<br>lines of credit
	Insured<br><br>(1)				Uninsured				Total		Total
Region<br><br>(2)
Canada
Atlantic provinces	$	8,407	48	%	$	8,944	52	%	$	17,351	$	1,602
Quebec		12,742	32			27,567	68			40,309		3,135
Ontario		34,211	20			135,767	80			169,978		15,891
Alberta		20,680	50			20,821	50			41,501		5,343
Saskatchewan and Manitoba		9,179	46			10,714	54			19,893		1,970
B.C. and territories		13,314	20			51,823	80			65,137		7,383
Total Canada <br>(3)		98,533	28			255,636	72			354,169		35,324
U.S. <br>(4)		1	–			23,422	100			23,423		1,413
Other International <br>(4)		–	–			2,740	100			2,740		1,518
Total International		1	–			26,162	100			26,163		2,931
Total	$	98,534	26	%	$	281,798	74	%	$	380,332	$	38,255
	As at October 31, 2020
(Millions of Canadian dollars,<br> <br>except percentage amounts)	Residential mortgages										Home equity<br>lines of credit
	Insured <br>(1)				Uninsured				Total		Total
Region<br><br>(2)
Canada
Atlantic provinces	$	8,181	51	%	$	7,824	49	%	$	16,005	$	1,684
Quebec		13,265	36			24,059	64			37,324		3,300
Ontario		37,779	26			110,247	74			148,026		16,147
Alberta		21,245	52			19,300	48			40,545		5,830
Saskatchewan and Manitoba		9,350	48			10,163	52			19,513		2,148
B.C. and territories		14,491	25			43,383	75			57,874		7,926
Total Canada <br>(3)		104,311	33			214,976	67			319,287		37,035
U.S. <br>(4)		1	–			20,331	100			20,332		1,651
Other International <br>(4)		–	–			2,978	100			2,978		1,282
Total International		1	–			23,309	100			23,310		2,933
Total	$	104,312	30	%	$	238,285	70	%	$	342,597	$	39,968
(1)	Insured residential mortgages are mortgages whereby our exposure to default is mitigated by insurance through the Canadian Mortgage and Housing Corporation or other private mortgage default insurers.
---	---
(2)	Region is based upon the address of the property mortgaged. The Atlantic provinces are comprised of Newfoundland and Labrador, Prince Edward Island, Nova Scotia and New Brunswick, and B.C. and territories are comprised of British Columbia, Nunavut, Northwest Territories and Yukon.
---	---
(3)	Total consolidated residential mortgages in Canada of $354 billion (October 31, 2020 – $319 billion) includes $11 billion (October 31, 2020 – $10 billion) of mortgages with commercial clients in Canadian Banking, of which $8 billion (October 31, 2020 – $7 billion) are insured mortgages, and $18 billion (October 31, 2020 – $18 billion) of residential mortgages held for securitization purposes in Capital Markets. All of the residential mortgages held for securitization purposes are insured (October 31, 2020 – all insured).
---	---
(4)	Home equity lines of credit include term loans collateralized by residential mortgages.
---	---

Home equity lines of credit are uninsured and reported within the personal loan category.

68 Royal Bank of Canada: Annual Report 2021 Management’s Discussion and Analysis

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Residential mortgages portfolio by amortization period

The following table provides a summary of the percentage of residential mortgages that fall within the remaining amortization periods based upon current customer payment amounts, which incorporate payments larger than the minimum contractual amount and/or higher frequency of payments.

Residential mortgages portfolio by amortization period	Table 45

---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
									October 31<br> <br>2020
			U.S. and other<br>International			Total			Canada		U.S. and other<br>International <br>(1)		Total
Amortization period
25 years	75	%		27	%		71	%		77%		29%		74%
> 25 years 30 years	25			71			28			22		68		25
> 30 years 35 years	–			2			1			1		3		1
Total	100	%		100	%		100	%		100%		100%		100%

All values are in British Pounds.

(1)	The percentage amounts of residential mortgages by remaining amortization period have been revised from those previously presented.

Average LTV ratios

The following table provides a summary of our average LTV ratios for newly originated and acquired uninsured residential mortgages and RBC Homeline Plan ® products by geographic region, as well as the respective LTV ratios for our total Canadian Banking residential mortgage portfolio outstanding:

Average LTV ratios	Table 46
	For the year ended
---	---	---	---	---	---	---	---	---
	October 31<br> <br>2021				October 31<br> <br>2020
	Uninsured				Uninsured
	Residential<br>mortgages<br><br>(1)		RBC Homeline<br>Plan<br>®<br> products<br><br>(2)		Residential<br>mortgages <br>(1)		RBC Homeline<br>Plan<br>®<br> products <br>(2)
Average of newly originated and acquired for the period, by region<br><br>(3)
Atlantic provinces		74%		75%		74%		75%
Quebec		72		74		73		73
Ontario		71		68		71		68
Alberta		73		72		73		72
Saskatchewan and Manitoba		74		75		74		75
B.C. and territories		69		67		69		66
U.S.		74		n.m.		72		n.m.
Other International		73		n.m.		69		n.m.
Average of newly originated and acquired for the period<br><br>(4)<br>, <br>(5)		72%		69%		71%		69%
Total Canadian Banking residential mortgages portfolio<br> <br>(6)		52%		46%		57%		49%
(1)	Residential mortgages exclude residential mortgages within the RBC Homeline Plan<br>®<br> products.
---	---
(2)	RBC Homeline Plan<br>®<br> products are comprised of both residential mortgages and home equity lines of credit.
---	---
(3)	Region is based upon address of the property mortgaged. The Atlantic provinces are comprised of Newfoundland and Labrador, Prince Edward Island, Nova Scotia and New Brunswick, and B.C. and territories are comprised of British Columbia, Nunavut, Northwest Territories and Yukon.
---	---
(4)	The average LTV ratio for newly originated and acquired uninsured residential mortgages and RBC Homeline Plan<br>®<br> products is calculated on a weighted basis by mortgage amounts at origination.
---	---
(5)	For newly originated mortgages and RBC Homeline Plan<br>®<br> products, LTV is calculated based on the total facility amount for the residential mortgage and RBC Homeline Plan<br>®<br> product divided by the value of the related residential property.
---	---
(6)	Weighted by mortgage balances and adjusted for property values based on the Teranet – National Bank National Composite House Price Index.
---	---
n.m.	not meaningful
---	---

Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2021 69

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Credit quality performance

The following credit quality performance tables and analysis provide information on loans, which represents loans, acceptances and commitments, and other financial assets.

Provision for credit losses	Table 47
	For the year ended
---	---	---	---	---	---	---
(Millions of Canadian dollars, except percentage amounts)	October 31<br> <br>2021			October 31<br> <br>2020
Personal & Commercial Banking	$	(168	)	$	2,875
Wealth Management		(46	)		212
Capital Markets		(453	)		1,140
Corporate Support and other		(5	)		4
PCL – Loans		(672	)		4,231
PCL – Other financial assets		(81	)		120
Total PCL	$	(753	)	$	4,351
PCL on loans is comprised of:
Retail	$	(684	)	$	1,071
Wholesale		(666	)		1,560
PCL on performing loans		(1,350	)		2,631
Retail		604			937
Wholesale		74			663
PCL on impaired loans		678			1,600
PCL – Loans	$	(672	)	$	4,231
PCL on loans as a % of average net loans and acceptances		(0.10)%			0.63%
PCL on impaired loans as a % of average net loans and acceptances		0.10%			0.24%
Additional information by geography<br> <br>(1)
Canada
Residential mortgages	$	24		$	35
Personal		254			395
Credit cards		288			471
Small business		31			49
Retail		597			950
Wholesale		86			163
PCL on impaired loans		683			1,113
U.S.
Retail		7			5
Wholesale		(10	)		377
PCL on impaired loans		(3	)		382
Other International
Retail		–			(18	)
Wholesale		(2	)		123
PCL on impaired loans		(2	)		105
PCL on impaired loans	$	678		$	1,600
(1)	Geographic information is based on residence of the borrower.
---	---

2021 vs. 2020

Total PCL was $(753) million. PCL on loans of $(672) million decreased $4,903 million from last year, due to lower provisions in Personal & Commercial Banking, Capital Markets and Wealth Management. The PCL on loans ratio of (10) bps decreased 73 bps.

PCL on performing loans was $(1,350) million, compared to $2,631 million in the prior year, reflecting elevated provisions in Personal & Commercial Banking, Capital Markets and Wealth Management in the prior year due to the impact of the COVID-19 pandemic and releases in the current year primarily driven by improvements in our macroeconomic and credit quality outlook.

PCL on impaired loans of $678 million decreased $922 million or 58%, largely reflecting the economic recovery underway in the current year. The decrease largely related to provisions taken in the prior year in Capital Markets and Wealth Management as compared to recoveries in the current year. Lower provisions in Personal & Commercial Banking also contributed to the decrease.

PCL on loans in Personal & Commercial Banking decreased $3,043 million, primarily reflecting provisions on performing loans in our Canadian Banking portfolios in the prior year as compared to releases in the current year, as described above. Lower provisions on impaired loans in our Canadian Banking retail portfolios also contributed to the decrease due to the economic recovery underway and the continued impact of the COVID-19 related government support programs.

70 Royal Bank of Canada: Annual Report 2021 Management’s Discussion and Analysis

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PCL on loans in Wealth Management decreased $258 million, due to lower provisions in U.S. Wealth Management (including City National). The decrease largely reflected provisions on performing loans in the prior year as compared to releases in the current year, as described above. Lower provisions on impaired loans, as described above, also contributed to the decrease, as the prior year reflected provisions on impaired loans compared to recoveries in the current year.

PCL on loans in Capital Markets decreased $1,593 million, mainly reflecting provisions on performing loans in the prior year as compared to releases in the current year, as described above. Lower provisions on impaired loans, as described above, also contributed to the decrease, as the prior year reflected provisions on impaired loans compared to recoveries in the current year, largely in the oil and gas sector.

Gross impaired loans (GIL)	Table 48
	As at and for the year ended
---	---	---	---	---	---	---
(Millions of Canadian dollars, except percentage amounts)	October 31<br> <br>2021			October 31<br> <br>2020
Personal & Commercial Banking	$	1,590		$	1,645
Wealth Management		233			345
Capital Markets		485			1,205
Total GIL	$	2,308		$	3,195
Canada <br>(1)
Retail	$	716		$	692
Wholesale		555			754
GIL		1,271			1,446
U.S. <br>(1)
Retail		23			32
Wholesale		412			1,039
GIL		435			1,071
Other International <br>(1)
Retail		212			216
Wholesale		390			462
GIL		602			678
Total GIL	$	2,308		$	3,195
Impaired loans, beginning balance	$	3,195		$	2,976
Classified as impaired during the period (new impaired) <br>(2)		1,726			3,837
Net repayments <br>(2)		(721	)		(1,498	)
Amounts written off		(1,169	)		(1,681	)
Other <br>(2), (3)		(723	)		(439	)
Impaired loans, balance at end of period	$	2,308		$	3,195
GIL as a % of related loans and acceptances
Total GIL as a % of related loans and acceptances		0.31%			0.47%
Personal & Commercial Banking		0.30%			0.33%
Canadian Banking		0.24%			0.26%
Caribbean Banking		4.65%			4.59%
Wealth Management		0.26%			0.41%
Capital Markets		0.45%			1.22%
(1)	Geographic information is based on residence of the borrower.
---	---
(2)	Certain GIL movements for Canadian Banking retail and wholesale portfolios are generally allocated to new impaired, as Net repayments and certain Other movements are not reasonably determinable. Certain GIL movements for Caribbean Banking retail and wholesale portfolios are generally allocated to Net repayments and new impaired, as Net repayments and certain Other movements are not reasonably determinable.
---	---
(3)	Includes return to performing status during the period, recoveries of loans and advances previously written off, sold, and foreign exchange translation and other movements.
---	---

2021 vs. 2020

Total GIL of $2,308 million decreased $887 million or 28% from last year and the total GIL ratio of 31 bps decreased 16 bps, due to lower impaired loans in Capital Markets, Wealth Management and Personal & Commercial Banking, reflecting the economic recovery underway.

GIL in Personal & Commercial Banking decreased $55 million or 3%, primarily due to lower impaired loans in our Canadian Banking commercial portfolios, reflecting the economic recovery underway and the continued impact of the COVID-19 related government support programs.

GIL in Wealth Management decreased $112 million or 32%, primarily due to lower impaired loans in U.S. Wealth Management (including City National), as described above, largely in the consumer staples sector.

GIL in Capital Markets decreased $720 million or 60%, due to lower impaired loans in most sectors, as described above, including the oil and gas sector.

Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2021 71

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Allowance for credit losses	Table 49
	As at
---	---	---	---	---
(Millions of Canadian dollars)	October 31<br> <br>2021		October 31<br> <br>2020
Personal & Commercial Banking	$	3,478	$	4,424
Wealth Management		320		404
Capital Markets		620		1,281
Corporate Support and other		1		6
ACL on loans		4,419		6,115
ACL on other financial assets		52		147
Total ACL	$	4,471	$	6,262
ACL on loans is comprised of:
Retail	$	2,287	$	2,932
Wholesale		1,435		2,234
ACL on performing loans	$	3,722	$	5,166
ACL on impaired loans		697		949
Additional information by geography<br> <br>(1)
Canada
Retail	$	150	$	164
Wholesale		182		220
ACL on impaired loans		332		384
U.S.
Retail		3		1
Wholesale		126		267
ACL on impaired loans		129		268
Other International
Retail		107		116
Wholesale		129		181
ACL on impaired loans		236		297
ACL on impaired loans	$	697	$	949
(1)	Geographic information is based on residence of the borrower.
---	---

2021 vs. 2020

Total ACL of $4,471 million decreased $1,791 million or 29% from last year, primarily reflecting a decrease of $1,696 million in ACL on loans.

ACL on performing loans of $3,722 million decreased $1,444 million or 28%, due to lower ACL in Personal & Commercial Banking, Capital Markets and Wealth Management, reflecting improvements in our macroeconomic and credit quality outlook driven by the economic recovery underway in the current year.

ACL on impaired loans of $697 million decreased $252 million or 27%, due to lower ACL in Capital Markets, Wealth Management and Personal & Commercial Banking.

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.
---

The measures of financial condition impacted by market risk are as follows:

1.	Positions whose revaluation gains and losses are reported in Revenue, which includes:
a)	Changes in the fair value of instruments classified or designated as FVTPL, and
---	---
b)	Hedge ineffectiveness.
---	---
2.	CET1 capital, which includes:
---	---
a)	All of the above, plus
---	---
b)	Changes in the fair value of FVOCI securities where revaluation gains and losses are reported as OCI,
---	---
c)	Changes in the Canadian dollar value of investments in foreign subsidiaries, net of hedges, due to foreign exchange translation, and
---	---
d)	Changes in the fair value of employee benefit plan deficits.
---	---
3.	CET1 ratio, which includes:
---	---
a)	All of the above, plus
---	---
b)	Changes in RWA resulting from changes in traded market risk factors, and
---	---
c)	Changes in the Canadian dollar value of RWA due to foreign exchange translation.
---	---
4.	The economic value of the Bank, which includes:
---	---
a)	Points 1 and 2 above, plus
---	---
b)	Changes in the economic value of other non-trading positions, net interest income, and fee based income, as a result of changes in market risk factors.
---	---

72 Royal Bank of Canada: Annual Report 2021 Management’s Discussion and Analysis

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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 Global 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.

These measures are computed on all positions that are FVTPL for financial reporting purposes, with the exception of those in a designated hedging relationship and those in our insurance businesses.

Market risk measures – FVTPL positions

Market risk measures*	Table 50
	October 31, 2021										October 31, 2020
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
				For the year ended										For the year ended
(Millions of Canadian dollars)	As at			Average			High		Low		As at			Average			High		Low
Equity	$	24		$	20		$	38	$	12	$	23		$	33		$	64	$	13
Foreign exchange		4			4			6		2		3			3			6		1
Commodities		3			3			4		2		3			3			7		1
Interest rate <br>(1)		61			44			64		21		47			54			178		11
Credit specific <br>(2)		9			8			11		6		7			6			7		4
Diversification <br>(3)		(51	)		(35	)		n.m.		n.m.		(18	)		(25	)		n.m.		n.m.
Market risk VaR	$	50		$	44		$	72	$	23	$	65		$	74		$	232	$	18
Market risk Stressed VaR	$	59		$	53		$	101	$	29	$	86		$	109		$	228	$	49
*	This table represents an integral part of our 2021 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.
---	---
n.m.	not meaningful
---	---

Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2021 73

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2021 vs. 2020

Average market risk VaR of $44 million decreased $30 million and average SVaR of $53 million decreased $56 million from last year, as overall market volatility and credit spreads improved in 2021 relative to the market turmoil observed in 2020. Loan underwriting commitments as well as fixed income and equity portfolios were impacted by the heightened market volatility last year. In 2021, VaR also reflected increased diversification across our trading businesses.

The following chart displays a bar graph of our daily trading profit and loss and a line graph of our daily market risk VaR. We incurred no net trading losses in 2021.

(1)	Includes loan underwriting commitments.

The following chart displays the distribution of daily trading profit and loss in 2021 and 2020 with no net trading losses in 2021 and 13 days of trading losses in 2020. The largest reported profit was $55 million with an average daily profit of $17 million.

(1)	Includes loan underwriting commitments.

Market risk measures for assets and liabilities of RBC Insurance ®

We offer a range of insurance products to clients and hold investments to meet the future obligations to policyholders. The investments which support actuarial liabilities are predominantly fixed income assets designated as FVTPL. Consequently, changes in the fair values of these assets are recorded in the Consolidated Statements of Income and are largely offset by changes in the fair value of the actuarial liabilities, the impact of which is reflected in Insurance policyholder benefits, claims and acquisition expense. As at October 31, 2021, we held assets in support of $13 billion of liabilities with respect to insurance obligations (October 31, 2020 – $12 billion).

74 Royal Bank of Canada: Annual Report 2021 Management’s Discussion and Analysis

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Market risk controls – Interest Rate Risk in the Banking Book (IRRBB) positions<br>1<br> <br>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.<br> <br>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<br> <br>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 shock scenarios prescribed by regulators.<br> <br>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 forecast based on past experience to determine response expectations under 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 do not include beneficial management actions that could be taken to reduce exposures.<br> <br>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.<br> <br>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 expected funding profile of mortgage rate commitments, fixed-rate loan prepayment behaviour, term deposit redemption behaviour, and the treatment 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<br> <br>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 rates scenarios which prevent EVE valuation and NII simulation 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<br> <br>2021																		October 31<br> <br>2020
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
	EVE risk									NII risk<br>(1)
(Millions of Canadian dollars)	Canadian<br> dollar impact			U.S. dollar<br> impact			Total			Canadian <br> dollar<br><br>impact			U.S. dollar<br> impact			Total			EVE risk			NII risk (1)
Before-tax impact of:
100 bps increase in rate<br>s	$	(1,641	)	$	(368	)	$	(2,009	)	$	571		$	358		$	929		$	(1,756	)	$	818
100 bps decrease in rate<br>s		1,540			(3	)		1,537			(603	)		(318	)		(921	)		1,321			(621	)
*	This table represents an integral part of our 2021 Annual Consolidated Financial Statements.
---	---
(1)	Represents the 12-month NII exposure to an instantaneous and sustained shift in interest rates<br>.
---	---

As at October 31, 2021, an immediate and sustained -100 bps shock would have had a n e gative impact to our NII of $921 million, up from $621 million last year, and an immediate and sustained +100 bps shock would have had a negative impact to our EVE of $2,009 million, up from $1,756 million last year. The year-over-year change in NII sensitivity is largely attributable to continued low cost deposit growth, while the year-over-year change in EVE sensitivity is mainly due to overall growth in the balance sheet, in particular growth in book capital. During 2021, NII and EVE risks remained within approved limits.

1	IRRBB positions include the impact of derivatives in hedge accounting relationships and FVOCI securities used for interest rate risk management.

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Market risk measures for other material non-trading portfolios

Investment securities carried at FVOCI

We held $78 billion of investment securities carried at FVOCI as at October 31, 2021, compared to $82 billion at the end of the prior year. We hold debt securities carried at FVOCI primarily as investments, as well as to manage liquidity risk and hedge interest rate risk in our non-trading banking balance sheet. As at October 31, 2021, our portfolio of investment securities carried at FVOCI is interest rate sensitive and would impact OCI by a pre-tax change in value of $8 million as measured by the change in the value of the securities for a one basis point parallel increase in yields. The portfolio also exposes us to credit spread risk of a pre-tax change in value of $14 million, as measured by the change in value for a one basis point widening of credit spreads. The value of the investment securities carried at FVOCI included in our IRRBB measures as at October 31, 2021 was $75 billion. Our investment securities carried at FVOCI also include equity exposures of $1 billion as at October 31, 2021, compared to $1 billion at the end of the prior year.

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.

Derivatives related to non-trading activity

Derivatives are also used to hedge market risk exposure unrelated to our trading activity. Hedge accounting is elected where applicable. These derivatives are included in our IRRBB measures and other internal non-trading market risk measures. We use interest rate swaps to manage our IRRBB, funding and investment activities. Interest rate swaps are also used to hedge changes in the fair value of certain fixed-rate instruments. We also use foreign exchange derivatives to manage our exposure to equity investments in subsidiaries that are denominated in foreign currencies, particularly the U.S. dollar, British Pound, and Euro.

For further details on the application of hedge accounting and the use of derivatives for hedging activities, refer to Notes 2 and 8 of our 2021 Annual Consolidated Financial Statements.

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Linkage of market risk to selected balance sheet items

The following tables provide the linkages between selected balance sheet items with positions included in our trading market risk and non-trading market risk disclosures, which illustrates how we manage market risk for our assets and liabilities through different risk measures:

Linkage of market risk to selected balance sheet items	Table 52
	As at October 31, 2021
---	---	---	---	---	---	---	---	---	---
				Market risk measure
(Millions of Canadian dollars)	Balance sheet<br> amount			Traded risk<br><br>(1)		Non-traded<br><br> risk<br><br>(2)			Non-traded<br> risk <br> primary risk sensitivity
Assets subject to market risk
Cash and due from banks	$	113,846		$	–	$	113,846		Interest rate
Interest-bearing deposits with banks		79,638			56,896		22,742		Interest rate
Securities
Trading		139,240			127,259		11,981		Interest rate, credit spread
Investment, net of applicable allowance		145,484			–		145,484		Interest rate, credit spread, equity
Assets purchased under reverse repurchase agreements and securities borrowed		307,903			265,011		42,892		Interest rate
Loans
Retail		503,598			9,231		494,367		Interest rate
Wholesale		218,066			9,685		208,381		Interest rate
Allowance for loan losses		(4,089	)		–		(4,089	)	Interest rate
Segregated fund net assets		2,666			–		2,666		Interest rate
Other
Derivatives		95,541			92,829		2,712		Interest rate, foreign exchange
Other assets		92,157			8,615		83,542		Interest rate
Assets not subject to market risk<br> <br>(3)		12,273
Total assets	$	1,706,323		$	569,526	$	1,124,524
Liabilities subject to market risk
Deposits	$	1,100,831		$	136,927	$	963,904		Interest rate
Segregated fund liabilities		2,666			–		2,666		Interest rate
Other
Obligations related to securities sold short		37,841			37,841		–
Obligations related to assets sold<br> under repurchase agreements and<br> securities loaned		262,201			236,146		26,055		Interest rate
Derivatives		91,439			89,290		2,149		Interest rate, foreign exchange
Other liabilities		87,084			8,528		78,556		Interest rate
Subordinated debentures		9,593			–		9,593		Interest rate
Liabilities not subject to market risk<br> <br>(4)		15,906
Total liabilities	$	1,607,561		$	508,732	$	1,082,923
Total equity		98,762
Total liabilities and equity	$	1,706,323
(1)	Traded risk includes positions that are classified or designated as FVTPL and positions whose revaluation gains and losses are reported in revenue. Market risk measures of VaR, SVaR, IRC and stress tests are used as risk controls for traded risk.
---	---
(2)	Non-traded risk includes positions used in the management of IRRBB and other non-trading portfolios. Other material non-trading portfolios include positions from RBC Insurance<br>®<br> and investment securities, net of applicable allowance, not included in IRRBB.
---	---
(3)	Assets not subject to market risk include physical and other assets.
---	---
(4)	Liabilities not subject to market risk include payroll related and other liabilities.
---	---

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	As at October 31, 2020
				Market risk measure
(Millions of Canadian dollars)	Balance sheet<br> amount			Traded risk <br>(1)		Non-traded<br><br> risk <br>(2)			Non-traded risk <br> primary risk sensitivity
Assets subject to market risk
Cash and due from banks	$	118,888		$	–	$	118,888		Interest rate
Interest-bearing deposits with banks		39,013			21,603		17,410		Interest rate
Securities
Trading		136,071			124,884		11,187		Interest rate, credit spread
Investment, net of applicable allowance		139,743			–		139,743		Interest rate, credit spread, equity
Assets purchased under reverse repurchase agreements and securities borrowed		313,015			264,394		48,621		Interest rate
Loans
Retail		457,976			10,392		447,584		Interest rate
Wholesale		208,655			6,855		201,800		Interest rate
Allowance for loan losses		(5,639	)		–		(5,639	)	Interest rate
Segregated fund net assets		1,922			–		1,922		Interest rate
Other
Derivatives		113,488			109,175		4,313		Interest rate, foreign exchange
Other assets		90,937			6,475		84,462		Interest rate
Assets not subject to market risk<br> <br>(3)		10,479
Total assets	$	1,624,548		$	543,778	$	1,070,291
Liabilities subject to market risk
Deposits	$	1,011,885		$	107,450	$	904,435		Interest rate
Segregated fund liabilities		1,922			–		1,922		Interest rate
Other
Obligations related to securities sold short		29,285			29,285		–
Obligations related to assets sold<br> under repurchase agreements and securities loaned		274,231			255,922		18,309		Interest rate
Derivatives		109,927			108,147		1,780		Interest rate, foreign exchange
Other liabilities		86,994			8,977		78,017		Interest rate
Subordinated debentures		9,867			–		9,867		Interest rate
Liabilities not subject to market risk<br> <br>(4)		13,670
Total liabilities	$	1,537,781		$	509,781	$	1,014,330
Total equity		86,767
Total liabilities and equity	$	1,624,548
(1)	Traded risk includes positions that are classified or designated as FVTPL and positions whose revaluation gains and losses are reported in revenue. Market risk measures of VaR, SVaR, IRC and stress tests are used as risk controls for traded risk.
---	---
(2)	Non-traded risk includes positions used in the management of IRRBB and other non-trading portfolios. Other material non-trading portfolios include positions from RBC Insurance<br>®<br> and investment securities, net of applicable allowance, not included in IRRBB.
---	---
(3)	Assets not subject to market risk include physical and other assets.
---	---
(4)	Liabilities not subject to market risk include payroll related and other liabilities.
---	---
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.<br> <br>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:<br> <br>• Achieving an appropriate balance between the level of exposure allowed under our risk appetite and the cost of risk mitigation;<br> <br>• Maintaining broad funding access, including preserving and promoting a reliable base of core client deposits and ongoing access to diversified wholesale funding sources;<br> <br>• 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;<br> <br>• Governance of pledging activity through limits and liquid asset buffers for potential pledging activity;<br> <br>• Timely and granular risk measurement information;<br> <br>• Transparent liquidity transfer pricing and cost allocation; and<br> <br>• Our three lines of defense governance model.
---

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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.

Our stress tests, which include elements of scenario and sensitivity analyses, measure our prospective exposure to systemic and RBC-specific events over a period of several weeks. Different levels of severity are considered for each type of crisis with some scenarios reflecting multiple-downgrades to our credit ratings.

The contingency liquidity risk planning process identifies contingent funding needs (e.g., draws on committed credit and liquidity lines, demands for more collateral and deposit run-off) and sources (e.g., contingent liquid asset sales and incremental wholesale funding capacity) under various stress scenarios, and as a result, informs requirements for our earmarked unencumbered liquid asset portfolios.

Our unencumbered liquid asset portfolios consist of diversified, highly rated and liquid marketable securities, overnight government reverse repos and deposits with central banks. These portfolios are subject to minimum asset quality levels and, as appropriate, other eligibility guidelines (e.g., maturity, diversification and eligibility for central bank advances) to maximize ready access to additional cash should it be required. These securities, when added to other unencumbered liquid assets that we hold as a result of capital markets or other activities, contribute to our liquidity reserve, and are reflected in the asset encumbrance disclosures shown below.

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Liquidity reserve and asset encumbrance

The following tables provide summaries of our liquidity reserve and asset encumbrance. In both tables, unencumbered assets represent, to varying degrees, a ready source of funding. Unencumbered assets are the difference between total and encumbered assets from both on- and off-balance sheet sources. The encumbered assets include: (i) bank-owned liquid assets that are either pledged as collateral (e.g., repo financing and derivative pledging) or not freely available due to regulatory or internal policy requirements (e.g., earmarked to satisfy mandatory reserve or regional capital adequacy requirements and to maintain continuous access to payment and settlement systems); (ii) securities received as collateral from securities financing and derivative transactions which have either been re-hypothecated where permissible (e.g., to obtain financing through repos or to cover securities sold short) or have no liquidity value since re-hypothecation is prohibited; and (iii) illiquid assets that have been securitized and sold into the market or that have been pledged as collateral in support of structured term funding vehicles. As per our liquidity management framework and practice, encumbered assets are not considered a source of liquidity.

Liquidity reserve

Our liquidity reserve consists of available unencumbered liquid assets. Although unused wholesale funding capacity, which is regularly assessed, could be another potential source of liquidity to mitigate stressed conditions, it is excluded in the determination of the liquidity reserve. Similarly, uncommitted and undrawn central bank borrowing facilities that could be accessed subject to satisfying certain preconditions as set by various central banks (e.g., BoC, the Fed, Bank of England, and Bank of France), as well as amounts that qualify as eligible collateral at the Federal Reserve Bank of New York (FRBNY) and Federal Home Loan Bank (FHLB) are also excluded from the determination of the liquidity reserve.

Liquidity reserve	Table 53
	As at October 31, 2021
---	---	---	---	---	---	---	---	---	---	---
(Millions of Canadian dollars)	Bank-owned<br><br> liquid assets		Securities<br> <br>received as<br> collateral from<br> securities<br> financing and<br> derivative<br> transactions		Total liquid<br> assets		Encumbered<br> liquid assets		Unencumbered<br> liquid assets
Cash and due from banks	$	113,846	$	–	$	113,846	$	3,405	$	110,441
Interest-bearing deposits with banks		79,638		–		79,638		–		79,638
Securities issued or guaranteed by sovereigns, central banks or multilateral development banks <br>(1)		214,326		313,732		528,058		357,927		170,131
Other securities		114,692		115,396		230,088		132,360		97,728
Other liquid assets <br>(2)		27,600		–		27,600		25,981		1,619
Total liquid assets	$	550,102	$	429,128	$	979,230	$	519,673	$	459,557
	As at October 31, 2020
(Millions of Canadian dollars)	Bank-owned<br> liquid assets		Securities<br> received as<br> collateral from<br> securities<br> financing and<br> derivative<br> transactions		Total liquid<br> assets		Encumbered<br> liquid assets		Unencumbered<br> liquid assets
Cash and due from banks	$	118,888	$	–	$	118,888	$	4,022	$	114,866
Interest-bearing deposits with banks		39,013		–		39,013		–		39,013
Securities issued or guaranteed by sovereigns, central banks or multilateral development banks <br>(1)		236,910		309,512		546,422		358,233		188,189
Other securities		93,781		101,317		195,098		89,764		105,334
Other liquid assets <br>(2)		30,305		–		30,305		27,934		2,371
Total liquid assets	$	518,897	$	410,829	$	929,726	$	479,953	$	449,773
	As at
(Millions of Canadian dollars)	October<br> <br>2021		October 31<br> <br>2020
Royal Bank of Canada	$	233,342	$	261,940
Foreign branches		68,567		44,037
Subsidiaries		157,648		143,796
Total unencumbered liquid assets	$	459,557	$	449,773
(1)	Includes liquid securities issued by provincial governments and U.S. government-sponsored entities working under U.S. Federal government’s conservatorship (e.g., Federal National Mortgage Association and Federal Home Loan Mortgage Corporation).
---	---
(2)	Encumbered liquid assets amount represents cash collateral and margin deposit amounts pledged related to OTC and exchange-traded derivative transactions.
---	---

The liquidity reserve is typically most affected by routine flows of client banking activity where liquid asset portfolios adjust to the change in cash balances, and additionally from capital markets activities where business strategies and client flows may also affect the addition or subtraction of liquid assets in the overall calculation of the liquidity reserve. Corporate Treasury also affects liquidity reserves through the management of funding issuances where reserves absorb timing mismatches between debt issuances and deployment into business activities.

80 Royal Bank of Canada: Annual Report 2021 Management’s Discussion and Analysis

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2021 vs. 2020

Total liquid assets increased $50 billion or 5% and total unencumbered liquid assets increased $10 billion or 2% from last year, mainly due to an increase in deposits with central banks reflecting higher wholesale funding and deposit levels, and an increase in securities received as collateral under collateral swap transactions and reverse repurchase agreements. However, the increase in collateral received was offset by an increase in collateral pledged under repurchase and collateral swap transactions.

Asset encumbrance

The table below provides a summary of our on- and off-balance sheet amounts for cash, securities and other assets, distinguishing between those that are encumbered or available for sale or use as collateral in secured funding transactions. Other assets, such as mortgages and credit card receivables, can also be monetized, albeit over longer timeframes than those required for marketable securities. As at October 31, 2021, our unencumbered assets available as collateral comprised 26% of total assets (October 31, 2020 – 28%).

Asset encumbrance	Table 54
	As at
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
	October 31<br><br>2021												October 31<br><br>2020
	Encumbered				Unencumbered								Encumbered				Unencumbered
(Millions of<br> Canadian dollars)	Pledged as<br> collateral		Other<br>(1)		Available as<br> collateral<br>(2)		Other<br>(3)			Total			Pledged as<br> collateral		Other (1)		Available as<br> collateral (2)		Other (3)			Total
Cash and due from banks	$	–	$	3,405	$	110,441	$	–		$	113,846		$	–	$	4,022	$	114,866	$	–		$	118,888
Interest-bearing deposits with banks		–		–		79,638		–			79,638			–		–		39,013		–			39,013
Securities
Trading		56,602		–		87,311		3,633			147,546			48,505		–		91,245		3,684			143,434
Investment, net of applicable allowance		12,055		–		133,429		–			145,484			13,337		–		126,353		53			139,743
Assets purchased under reverse repurchase agreements and securities borrowed <br>(4)		437,408		18,310		17,436		5,343			478,497			400,807		17,209		37,879		5,037			460,932
Loans
Retail
Mortgage securities		29,370		–		30,778		–			60,148			31,460		–		40,050		–			71,510
Mortgage loans		46,699		–		29,858		243,627			320,184			62,131		–		26,389		182,567			271,087
Non-mortgage loans		3,213		–		8,110		111,943			123,266			5,711		–		12,006		97,662			115,379
Wholesale		–		–		–		218,066			218,066			–		–		–		208,655			208,655
Allowance for loan losses		–		–		–		(4,089	)		(4,089	)		–		–		–		(5,639	)		(5,639	)
Segregated fund net assets		–		–		–		2,666			2,666			–		–		–		1,922			1,922
Other
Derivatives		–		–		–		95,541			95,541			–		–		–		113,488			113,488
Others <br>(5)		25,981		–		1,619		76,830			104,430			27,934		–		2,371		71,111			101,416
Total assets	$	611,328	$	21,715	$	498,620	$	753,560		$	1,885,223		$	589,885	$	21,231	$	490,172	$	678,540		$	1,779,828
(1)	Includes assets restricted from use to generate secured funding due to legal or other constraints.
---	---
(2)	Represents assets that are readily available for use as collateral, including NHA MBS, our unencumbered mortgage loans that qualify as eligible collateral at FHLB, as well as loans that qualify as eligible collateral for discount window facility available to us and lodged at the FRBNY.
---	---
(3)	Other unencumbered assets are not subject to any restrictions on their use to secure funding or as collateral but would not be considered readily available.
---	---
(4)	Includes bank-owned liquid assets and securities received as collateral from off-balance sheet securities financing, derivative transactions, and margin lending. Includes $18 billion (October 31, 2020 – $17 billion) of collateral received through reverse repurchase transactions that cannot be rehypothecated in its current legal form.
---	---
(5)	The Pledged as collateral amount represents cash collateral and margin deposit amounts pledged related to OTC and exchange-traded derivative transactions.
---	---

Funding

Funding strategy<br><br>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.

Deposit and funding profile

As at October 31, 2021, relationship-based deposits, which are the primary source of funding for retail loans and mortgages, were $771 billion or 55% of our total funding (October 31, 2020 – $708 billion or 54%). The remaining portion is comprised of short- and long-term wholesale funding.

Funding for highly liquid assets consists primarily of short-term wholesale funding that reflects the monetization period of those assets. Long-term wholesale funding is used mostly to fund less liquid wholesale assets and to support liquid asset buffers.

Senior long-term debt issued by the bank on or after September 23, 2018, that has an original term greater than 400 days and is marketable, subject to certain exceptions, is subject to the Canadian Bank Recapitalization (Bail-in) regime. Under the Bail-in regime, in circumstances when the Superintendent of Financial Institutions has determined that a bank may no longer be viable, the Governor in C o uncil may, upon a recommendation of the Minister of Finance that he or she is of the opinion that it is in the public interest to do so, grant an order directing the Canada Deposit Insurance Corporation (CDIC) to convert all or a portion of certain shares and liabilities of that bank into common shares. As at October 31, 2021, the notional value of issued and outstanding long-term debt subject to conversion under the Bail-in regime was $53 billion (October 31, 2020 – $37 billion).

For further details on our wholesale funding, refer to the Composition of wholesale funding tables below.

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Long-term debt issuance

During 2021, we continued to experience favourable unsecured wholesale funding access and pricing. We issued, either directly or through our subsidiaries, unsecured long-term funding of $28 billion in various currencies and markets, which was more than offset by maturities.

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.

Compared to 2020, our outstanding MBS sold decreased $1.7 billion. Our covered bonds and securitized credit card receivables decreased $2.2 billion and $2.5 billion, respectively.

For further details, refer to the Off-balance sheet arrangements section.

Long-term funding sources*<br><br>(1)	Table 55
	As at
---	---	---	---	---	---
(Millions of Canadian dollars)		October 31<br><br>2021		October 31<br><br>2020
Unsecured long-term funding		$	89,447	$	88,055
Secured long-term funding			56,688		63,043
Subordinated debentures			9,620		9,574
		$	155,755	$	160,672
*	This table represents an integral part of our 2021 Annual Consolidated Financial Statements.
---	---
(1)	Based on original term to maturity greater than 1 year.
---	---

Our wholesale funding activities are well-diversified by geography, investor segment, instrument, currency, structure and maturity. We maintain an ongoing presence in different funding markets which allows us to continuously monitor market developments and trends, identify opportunities and risks, and take appropriate and timely actions. We operate long-term debt issuance registered programs. The following table summarizes these programs with their authorized limits by geography.

Programs by geography	Table 56
Canada	U.S.	Europe/Asia
---	---	---
• Canadian Shelf Program – $25 billion	• U.S. Shelf Program – US$50 billion	• European Debt Issuance Program – US$40 billion
		• Global Covered Bond Program – <br>€<br>60 billion
		• Japanese Issuance Programs – ¥1 trillion

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).

We continuously evaluate opportunities to expand into new markets and untapped investor segments since diversification expands our wholesale funding flexibility, minimizes funding concentration and dependency, and generally reduces financing costs. As presented in the following charts, our current long-term debt profile is well-diversified by both currency and product. Maintaining competitive credit ratings is also critical to cost-effective funding.

(1) Includes unsecured and secured long-term funding with an original term to maturity greater than 1 year	(1) Includes unsecured and secured long-term funding with an original term to maturity greater than 1 year<br><br>(2) Mortgage-backed securities and Canada Mortgage Bonds

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The following table provides our composition of wholesale funding based on remaining term to maturity:

Composition of wholesale funding<br><br>(1)	Table 57
	As at October 31, 2021
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
(Millions of Canadian dollars)	Less than<br> 1 month		1 to 3<br> months		3 to 6<br> months		6 to 12<br> months		Less than<br> 1 year<br> sub-total		1 year to<br> 2 years		2 years and<br> greater		Total
Deposits from banks <br>(2)	$	5,202	$	–	$	–	$	–	$	5,202	$	–	$	–	$	5,202
Certificates of deposit and commercial paper		7,118		17,013		19,046		27,053		70,230		918		–		71,148
Asset-backed commercial paper <br>(3)		2,378		2,563		4,076		3,697		12,714		–		–		12,714
Senior unsecured medium-term notes <br>(4)		27		939		8,944		2,622		12,532		16,296		37,617		66,445
Senior unsecured structured notes <br>(5)		118		825		817		714		2,474		2,914		5,879		11,267
Mortgage securitization		–		354		1,302		917		2,573		4,260		9,729		16,562
Covered bonds/asset-backed securities (6)		–		847		495		5,189		6,531		6,087		27,521		40,139
Subordinated liabilities		–		–		–		188		188		165		9,267		9,620
Other <br>(7)		6,637		2,194		1,448		827		11,106		7,531		466		19,103
Total	$	21,480	$	24,735	$	36,128	$	41,207	$	123,550	$	38,171	$	90,479	$	252,200
Of which:
– Secured	$	8,467	$	4,017	$	6,108	$	9,803	$	28,395	$	10,347	$	37,695	$	76,437
– Unsecured		13,013		20,718		30,020		31,404		95,155		27,824		52,784		175,763
	As at October 31, 2020
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
(Millions of Canadian dollars)	Less than<br> 1 month		1 to 3<br> months		3 to 6<br> months		6 to 12<br> months		Less than<br> 1 year<br> sub-total		1 year to<br> 2 years		2 years and<br> greater		Total
Deposits from banks <br>(2)	$	8,681	$	133	$	73	$	–	$	8,887	$	–	$	–	$	8,887
Certificates of deposit and commercial paper		2,542		6,858		11,145		23,783		44,328		–		–		44,328
Asset-backed commercial paper <br>(3)		2,618		2,167		1,381		6,081		12,247		–		–		12,247
Senior unsecured medium-term notes <br>(4)		37		4,466		9,836		7,163		21,502		9,413		37,259		68,174
Senior unsecured structured notes <br>(5)		230		165		401		1,136		1,932		1,485		5,333		8,750
Mortgage securitization		–		1,171		267		2,178		3,616		2,561		12,225		18,402
Covered bonds/asset-backed securities <br>(6)		–		3,688		5,919		5,131		14,738		6,896		23,196		44,830
Subordinated liabilities		–		1,499		–		1,000		2,499		205		6,870		9,574
Other <br>(7)		7,906		892		1,134		1,037		10,969		624		6,726		18,319
Total	$	22,014	$	21,039	$	30,156	$	47,509	$	120,718	$	21,184	$	91,609	$	233,511
Of which:
– Secured	$	10,089	$	7,508	$	7,643	$	13,573	$	38,813	$	9,457	$	35,421	$	83,691
– Unsecured		11,925		13,531		22,513		33,936		81,905		11,727		56,188		149,820
(1)	Excludes bankers’ acceptances and repos.
---	---
(2)	Excludes deposits associated with services we provide to banks (e.g., custody, cash management).
---	---
(3)	Only includes consolidated liabilities, including our collateralized commercial paper program.
---	---
(4)	Includes deposit notes.
---	---
(5)	Includes notes where the payout is tied to movements in foreign exchange, commodities and equities.
---	---
(6)	Includes credit card and mortgage loans.
---	---
(7)	Includes tender option bonds (secured) of $7,020 million (October 31, 2020 – $8,199 million), bearer deposit notes (unsecured) of $3,798 million (October 31, 2020 – $2,036 million), other long-term structured deposits (unsecured) of $8,285 million (October 31, 2020 – $8,071 million), and FHLB advances (secured) of $nil (October 31, 2020 – $13 million).
---	---

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Credit ratings

Our ability to access unsecured funding markets and to engage in certain collateralized business activities on a cost-effective basis are primarily dependent upon maintaining competitive credit ratings. Credit ratings and outlooks provided by rating agencies reflect their views and methodologies. Ratings are subject to change, based on a number of factors including, but not limited to, our financial strength, competitive position, liquidity and other factors not completely within our control.

The following table presents our major credit ratings:

Credit ratings<br><br>(1)	Table 58
	As at November 30, 2021
---	---	---	---	---	---
	Short-term debt	Legacy senior long-term debt<br><br>(2)	Senior long-term debt<br><br>(3)	Outlook
Moody’s <br>(4)	P-1	Aa2	A2		under review
Standard & Poor’s <br>(5)	A-1+	AA-	A		stable
Fitch Ratings <br>(6)	F1+	AA	AA-		stable
DBRS <br>(7)	R-1 (high)	AA (high)	AA		stable
(1)	Credit ratings are not recommendations to purchase, sell or hold a financial obligation inasmuch as they do not comment on market price or suitability for a particular investor. Ratings are determined by the rating agencies based on criteria established from time to time by them, and are subject to revision or withdrawal at any time by the rating organization.
---	---
(2)	Includes senior long-term debt issued prior to September 23, 2018 and senior long-term debt issued on or after September 23, 2018 which is excluded from the Bail-in regime.
---	---
(3)	Includes senior long-term debt issued on or after September 23, 2018 which is subject to conversion under the Bail-in regime.
---	---
(4)	On October 7, 2021, Moody’s placed our long-term ratings and assessments on review for upgrade. Our short-term debt ratings were affirmed.
---	---
(5)	Standard & Poor’s affirmed our ratings with a stable outlook as of July 19, 2021 in a report published on October 7, 2021.
---	---
(6)	On July 15, 2021, Fitch Ratings downgraded our legacy senior long-term debt rating to AA from AA+ and our senior long-term debt rating to AA- from AA and revised our ratings outlook to stable from negative.
---	---
(7)	On May 14, 2021, DBRS affirmed our ratings with a stable outlook.
---	---

Additional contractual obligations for rating downgrades

We are required to deliver collateral to certain counterparties in the event of a downgrade to our current credit rating. The following table provides the additional collateral obligations required at the reporting date in the event of a one-, two- or three-notch downgrade to our credit ratings. These additional collateral obligations are incremental requirements for each successive downgrade and do not represent the cumulative impact of multiple downgrades. The amounts reported change periodically as a result of several factors, including the transfer of trading activity to centrally cleared financial market infrastructures and exchanges, the expiration of transactions with downgrade triggers, the imposition of internal limitations on new agreements to exclude downgrade triggers, as well as normal course mark-to-market. There is no outstanding senior debt issued in the market that contains rating triggers that would lead to early prepayment of principal.

Additional contractual obligations for rating downgrades	Table 59
	As at
---	---	---	---	---	---	---	---	---	---	---	---	---
	October 31<br><br>2021						October 31<br><br>2020
(Millions of Canadian dollars)	One-notch<br><br>downgrade		Two-notch<br><br>downgrade		Three-notch<br><br>downgrade		One-notch<br><br>downgrade		Two-notch<br><br>downgrade		Three-notch<br><br>downgrade
Contractual derivatives funding or margin requirements	$	312	$	112	$	140	$	318	$	78	$	149
Other contractual funding or margin requirements <br>(1)		157		13		–		187		–		–
(1)	Includes GICs issued by our municipal markets business out of New York.
---	---

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Liquidity Coverage Ratio (LCR)

The LCR is a Basel III metric that measures the sufficiency of high-quality liquid assets (HQLA) available to meet liquidity needs over a 30-day period in an acute stress scenario. The BCBS and OSFI regulatory minimum coverage level for LCR is 100%.

OSFI requires Canadian banks to disclose the LCR using the standard Basel disclosure template and calculated using the average of daily LCR positions during the quarter.

Liquidity coverage ratio<br><br>(1)	Table 60
	For the three months ended
---	---	---	---	---
	October 31<br><br> <br>2021
(Millions of Canadian dollars, except percentage amounts)	Total unweighted<br> value (average)<br> (2)		Total weighted<br> value (average)
High-quality liquid assets
Total high-quality liquid assets (HQLA)			$	351,831
Cash outflows
Retail deposits and deposits from small business customers, of which:	$	365,319	$	33,871
Stable deposits<br><br>(3)		127,834		3,835
Less stable deposits		237,485		30,036
Unsecured wholesale funding, of which:		434,693		203,998
Operational deposits (all counterparties) and deposits in networks of cooperative banks<br><br>(4)		192,918		45,812
Non-operational deposits		211,916		128,327
Unsecured debt		29,859		29,859
Secured wholesale funding				25,855
Additional requirements, of which:		277,097		64,671
Outflows related to derivative exposures and other collateral requirements		46,158		16,656
Outflows related to loss of funding on debt products		8,558		8,558
Credit and liquidity facilities		222,381		39,457
Other contractual funding obligations<br> <br>(5)		25,405		25,405
Other contingent funding obligations<br> <br>(6)		625,278		10,012
Total cash outflows			$	363,812
Cash inflows
Secured lending (e.g., reverse repos)	$	260,070	$	41,814
Inflows from fully performing exposures		14,648		8,940
Other cash inflows		27,744		27,744
Total cash inflows			$	78,498
			Total adjusted<br> value
Total HQLA			$	351,831
Total net cash outflows				285,314
Liquidity coverage ratio				123%
	July 31<br><br>2021
(Millions of Canadian dollars, except percentage amounts)			Total adjusted<br> value
Total HQLA			$	341,167
Total net cash outflows				271,938
Liquidity coverage ratio				125%
(1)	The LCR is calculated in accordance with OSFI’s LAR guideline, which, in turn, reflects liquidity-related requirements issued by the BCBS. The LCR for the quarter ended October 31, 2021 is calculated as an average of 61 daily positions.
---	---
(2)	With the exception of other contingent funding obligations, unweighted inflow and outflow amounts are items maturing or callable in 30 days or less. Other contingent funding obligations also include debt securities with remaining maturity greater than 30 days.
---	---
(3)	As defined by the BCBS, stable deposits from retail and small business customers are deposits that are insured and are either held in transactional accounts or the bank has an established relationship with the client making the withdrawal unlikely.
---	---
(4)	Operational deposits from customers other than retail and small and medium-sized enterprises, are deposits which clients need to keep with the bank in order to facilitate their access and ability to use payment and settlement systems primarily for clearing, custody and cash management activities.
---	---
(5)	Other contractual funding obligations primarily include outflows from unsettled securities trades and outflows from obligations related to securities sold short.
---	---
(6)	Other contingent funding obligations include outflows related to other off-balance sheet facilities that carry low LCR runoff factors (0% – 5%).
---	---

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We manage our LCR position within a target range that reflects our liquidity risk tolerance and takes into account business mix, asset composition and funding capabilities. The range is subject to periodic review in light of changes to internal requirements and external developments.

We maintain HQLAs in major currencies with dependable market depth and breadth. Our treasury management practices ensure that the levels of HQLA are actively managed to meet target LCR objectives. Our Level 1 assets, as calculated according to OSFI LAR and the BCBS LCR requirements, represent 88% of total HQLA. These assets consist of cash, placements with central banks and highly rated securities issued or guaranteed by governments, central banks and supranational entities.

LCR captures cash flows from on- and off-balance sheet activities that are either expected or could potentially occur within 30 days in an acute stress scenario. Cash outflows result from the application of withdrawal and non-renewal factors to demand and term deposits, differentiated by client type (wholesale, retail and small- and medium-sized enterprises). Cash outflows also arise from business activities that create contingent funding and collateral requirements, such as repo funding, derivatives, short sales of securities and the extension of credit and liquidity commitments to clients. Cash inflows arise primarily from maturing secured loans, interbank loans and non-HQLA securities.

LCR does not reflect any market funding capacity that we believe would be available in a stress situation. All maturing wholesale debt is assigned 100% outflow in the LCR calculation.

Q4 2021 vs. Q3 2021

The average LCR for the quarter ended October 31, 2021 was 123%, which translates into a surplus of approximately $67 billion, compared to 125% and a surplus of approximately $69 billion in the prior quarter. LCR has remained relatively stable compared to the previous quarter as growth in retail and wholesale loans was offset by the issuance of term funding and increases in client deposits.

Net Stable Funding Ratio (NSFR)

NSFR is a Basel III metric that measures the sufficiency of available stable funding relative to the amount of required stable funding. The BCBS and OSFI regulatory minimum coverage level for NSFR is 100%.

Available stable funding is defined as the portion of capital and liabilities expected to be reliable over the time horizon considered by the NSFR, which extends to one year. Required stable funding is a function of the liquidity characteristics and residual maturities of the various assets held by the bank as well as those of its off-balance sheet exposures.

Beginning in Q1 2021, OSFI requires Canadian D-SIBs to disclose the NSFR using the standard Basel disclosure template. Amounts presented in this disclosure template are determined in accordance with the requirements of OSFI’s Liquidity Adequacy Requirements (LAR) guideline and are not necessarily aligned with the classification requirements prescribed under IFRS.

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Net Stable Funding Ratio<br><br>(1)	Table 61
	As at October 31, 2021
---	---	---	---	---	---	---	---	---	---	---
	Unweighted value by residual maturity<br>(2)								Weighted<br><br>value
(Millions of Canadian dollars, except percentage amounts)	No maturity		< 6 months		6 months to<br> < 1 year		><br> 1 year
Available Stable Funding (ASF) Item
Capital:	$	98,657	$	–	$	–	$	9,780	$	108,437
Regulatory Capital		98,657		–		–		9,780		108,437
Other Capital Instruments		–		–		–		–		–
Retail deposits and deposits from small business customers:		338,850		56,126		19,180		21,077		402,072
Stable deposits<br> <br>(3)		112,745		27,678		11,442		8,284		152,556
Less stable deposits		226,105		28,448		7,738		12,793		249,516
Wholesale funding:		325,980		380,619		45,376		102,542		304,767
Operational deposits<br><br>(4)		200,589		–		–		–		100,294
Other wholesale funding		125,391		380,619		45,376		102,542		204,473
Liabilities with matching interdependent assets<br> <br>(5)		–		3,285		1,823		25,814		–
Other liabilities:		41,303		227,149						12,551
NSFR derivative liabilities				16,437
All other liabilities and equity not included in the above categories		41,303		197,838		646		12,228		12,551
Total ASF									$	827,827
Required Stable Funding (RSF) Item
Total NSFR high-quality liquid assets (HQLA)									$	39,600
Deposits held at other financial institutions for<br> operational purposes		–		2,296		–		–		1,148
Performing loans and securities:		173,103		263,702		108,916		428,508		580,182
Performing loans to financial institutions secured by<br> Level 1 HQLA		–		99,892		13,113		1		12,573
Performing loans to financial institutions secured by<br> non-Level 1 HQLA and unsecured performing loans to<br> financial institutions		4,050		61,165		31,185		21,766		48,234
Performing loans to non-financial corporate clients, loans to<br> retail and small business customers, and loans to sovereigns,<br> central banks and PSEs, of which:		101,495		84,678		35,109		124,475		246,561
With a risk weight of less than or equal to 35% under the<br> Basel II standardized approach for credit risk		–		1,189		915		3,800		3,522
Performing residential mortgages, of which:		37,141		15,776		29,033		261,615		228,078
With a risk weight of less than or equal to 35% under the<br> Basel II standardized approach for credit risk		37,141		15,747		29,002		260,656		227,233
Securities that are not in default and do not qualify as HQLA,<br> including exchange-traded equities		30,417		2,191		476		20,651		44,736
Assets with matching interdependent liabilities<br><br>(5)		–		3,285		1,823		25,814		–
Other assets:		1,619		278,154						68,743
Physical traded commodities, including gold		1,619								1,376
Assets posted as initial margin for derivative contracts and<br> contributions to default funds of CCPs				16,650						14,153
NSFR derivative assets				17,103						666
NSFR derivative liabilities before deduction of variation<br> margin posted				34,777						1,739
All other assets not included in the above categories		–		161,184		46		48,394		50,809
Off-balance sheet items				649,799						23,665
Total RSF									$	713,338
Net Stable Funding Ratio (%)										116%
	As at July 31, 2021
---	---	---	---
(Millions of Canadian dollars, except percentage amounts)		Weighted<br><br>value
Total ASF		$	805,804
Total RSF			695,368
Net Stable Funding Ratio (%)			116%
(1)	The NSFR is calculated in accordance with OSFI’s Liquidity Adequacy Requirements (LAR) guideline, which, in turn, reflects liquidity-related requirements issued by the BCBS.
---	---
(2)	Totals for the following rows encompass the residual maturity categories of less than 6 months, 6 months to less than 1 year, and greater than or equal to 1 year in accordance with the requirements of the common disclosure template prescribed by OSFI: Other liabilities, NSFR derivative liabilities, Other assets, Assets posted as initial margin for derivative contracts and contributions to default funds of CCPs, NSFR derivative assets, NSFR derivative liabilities before deduction of variation margin posted, and Off-balance sheet items.
---	---
(3)	As defined by the BCBS, stable deposits from retail and small business customers are deposits that are insured and are either held in transactional accounts or the bank has an established relationship with the client making the withdrawal unlikely.
---	---
(4)	Operational deposits from customers other than retail and small and medium-sized enterprises, are deposits which clients need to keep with the bank in order to facilitate their access and ability to use payment and settlement systems primarily for clearing, custody and cash management activities.
---	---
(5)	Interdependent assets and liabilities represent National Housing Act Mortgage-Backed Securities (NHA MBS) liabilities, including liabilities arising from transactions involving the Canada Mortgage Bond program and their corresponding encumbered mortgages.
---	---

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Available stable funding is comprised primarily of a diversified pool of personal and commercial deposits, capital, as well as long-term wholesale liabilities. Required stable funding is driven mainly by the bank’s mortgage and loan portfolio, secured loans to financial institutions and to a lesser extent by other less liquid assets. NSFR does not reflect any unused market funding capacity that we believe is available to the bank.

Volume and composition of available stable funding is actively managed to optimize our structural funding position and meet NSFR objectives. Our NSFR is managed in accordance with our comprehensive LRMF.

Q4 2021 vs. Q3 2021

The NSFR as at October 31, 2021 was 116%, which translates into a surplus of approximately $114 billion, compared to 116% and a surplus of approximately $110 billion in the prior quarter. NSFR has remained stable compared to the previous quarter as growth in retail and wholesale loans was offset by the issuance of term funding and increases in client deposits.

Contractual maturities of financial assets, financial liabilities and off-balance sheet items

The following tables provide remaining contractual maturity profiles of all our assets, liabilities, and off-balance sheet items at their carrying value (e.g., amortized cost or fair value) at the balance sheet date. Off-balance sheet items are allocated based on the expiry date of the contract.

Details of contractual maturities and commitments to extend funds are a source of information for the management of liquidity risk. Among other purposes, these details form a basis for modelling a behavioural balance sheet with effective maturities to calculate liquidity risk measures. For further details, refer to the Risk measurement section.

Contractual maturities of financial assets, financial liabilities and off-balance sheet items	Table 62
	As at October 31, 2021
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
(Millions of Canadian dollars)	Less than<br> 1 month		1 to 3<br> months		3 to 6<br> months		6 to 9<br> months		9 to 12<br> months		1 year<br> to 2 years		2 years<br> to 5 years		5 years<br> and greater		With no<br> specific<br> maturity		Total
Assets
Cash and deposits with banks	$	190,995	$	2	$	1	$	–	$	–	$	–	$	–	$	–	$	2,486	$	193,484
Securities
Trading (1)		67,655		46		87		41		6		20		169		9,845		61,371		139,240
Investment, net of applicable allowance		7,220		4,811		5,546		5,832		5,514		22,368		31,393		62,289		511		145,484
Assets purchased under reverse<br> repurchase agreements and<br> securities borrowed (2)		104,301		89,612		51,664		22,982		16,987		98		–		–		22,259		307,903
Loans, net of applicable allowance		28,517		21,630		26,094		31,910		26,921		139,050		298,659		62,215		82,579		717,575
Other
Customers’ liability<br> under acceptances		12,654		7,209		5		–		–		5		–		–		(75)		19,798
Derivatives		5,325		10,788		4,318		4,334		3,005		10,139		17,890		39,733		9		95,541
Other financial assets		33,149		1,523		1,942		145		135		270		277		2,044		3,351		42,836
Total financial assets		449,816		135,621		89,657		65,244		52,568		171,950		348,388		176,126		172,491		1,661,861
Other non-financial assets		6,079		1,681		164		217		185		1,957		2,377		5,898		25,904		44,462
Total assets	$	455,895	$	137,302	$	89,821	$	65,461	$	52,753	$	173,907	$	350,765	$	182,024	$	198,395	$	1,706,323
Liabilities and equity
Deposits (3)
Unsecured borrowing	$	82,183	$	44,058	$	56,519	$	36,342	$	35,792	$	30,625	$	45,745	$	18,320	$	661,924	$	1,011,508
Secured borrowing		2,442		4,244		7,543		4,362		2,804		9,557		15,040		6,118		–		52,110
Covered bonds		1		848		–		2,693		1,878		5,350		18,321		8,122		–		37,213
Other
Acceptances		12,653		7,207		5		2		–		5		–		–		1		19,873
Obligations related to securities<br> sold short		37,841		–		–		–		–		–		–		–		–		37,841
Obligations related to assets sold<br> under repurchase agreements<br> and securities loaned (2)		168,763		62,338		5,610		4,742		848		668		–		–		19,232		262,201
Derivatives		5,456		9,903		4,938		3,747		2,723		9,211		18,727		36,733		1		91,439
Other financial liabilities		33,489		1,299		1,048		439		373		1,000		2,115		10,226		795		50,784
Subordinated debentures		–		–		–		–		188		110		1,912		7,383		–		9,593
Total financial liabilities		342,828		129,897		75,663		52,327		44,606		56,526		101,860		86,902		681,953		1,572,562
Other non-financial liabilities		1,663		6,907		434		290		155		1,108		1,172		13,360		9,910		34,999
Equity		–		–		–		–		–		–		–		–		98,762		98,762
Total liabilities and equity	$	344,491	$	136,804	$	76,097	$	52,617	$	44,761	$	57,634	$	103,032	$	100,262	$	790,625	$	1,706,323
Off-balance sheet items
Financial guarantees	$	387	$	1,950	$	2,999	$	2,928	$	2,206	$	1,829	$	3,326	$	1,181	$	61	$	16,867
Commitments to extend credit		5,964		5,538		11,400		16,231		12,024		56,688		160,789		16,733		4,544		289,911
Other credit-related commitments		966		1,064		1,569		1,536		1,376		370		726		38		99,815		107,460
Other commitments		101		11		20		21		21		64		144		278		618		1,278
Total off-balance sheet items	$	7,418	$	8,563	$	15,988	$	20,716	$	15,627	$	58,951	$	164,985	$	18,230	$	105,038	$	415,516
(1)	Trading debt securities classified as FVTPL have been included in the less than 1 month category as there is no expectation to hold these assets to their contractual maturity.
---	---
(2)	Open reverse repo and repo contracts, which have no set maturity date and are typically short term, have been included in the with no specific maturity category.
---	---
(3)	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 section.
---	---

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	As at October 31, 2020
(Millions of Canadian dollars)	Less than<br> 1 month		1 to 3<br> months		3 to 6<br> months		6 to 9<br> months		9 to 12<br> months		1 year<br> to 2 years		2 years<br> to 5 years		5 years<br> and greater		With no<br> specific<br> maturity			Total
Assets
Cash and deposits with banks	$	155,418	$	2	$	–	$	–	$	–	$	–	$	–	$	–	$	2,481		$	157,901
Securities
Trading (1)		82,486		51		49		25		80		50		98		9,615		43,617			136,071
Investment, net of applicable allowance		3,213		4,762		6,445		10,765		9,079		26,313		25,315		53,355		496			139,743
Assets purchased under reverse repurchase agreements and securities borrowed (2), (3)		147,453		62,905		47,211		25,083		9,990		2		–		–		20,371			313,015
Loans, net of applicable allowance		24,334		21,593		24,742		28,236		25,951		132,783		266,935		56,253		80,165			660,992
Other
Customers’ liability under acceptances		12,157		6,402		50		–		–		–		5		–		(107	)		18,507
Derivatives		5,035		10,946		4,932		3,433		2,726		13,550		20,205		52,650		11			113,488
Other financial assets		32,713		2,741		1,520		499		71		323		257		2,099		2,692			42,915
Total financial assets		462,809		109,402		84,949		68,041		47,897		173,021		312,815		173,972		149,726			1,582,632
Other non-financial assets		4,540		1,411		97		860		234		1,939		1,802		5,988		25,045			41,916
Total assets	$	467,349	$	110,813	$	85,046	$	68,901	$	48,131	$	174,960	$	314,617	$	179,960	$	174,771		$	1,624,548
Liabilities and equity
Deposits (4)
Unsecured borrowing (3)	$	75,380	$	36,569	$	56,348	$	35,881	$	30,676	$	23,293	$	52,029	$	15,360	$	590,020		$	915,556
Secured borrowing		2,794		6,605		4,022		6,242		4,142		7,400		18,705		6,427		–			56,337
Covered bonds		–		1,942		5,412		1,295		2,501		3,707		16,195		8,940		–			39,992
Other
Acceptances		12,158		6,401		50		–		–		–		–		–		9			18,618
Obligations related to securities sold short		29,285		–		–		–		–		–		–		–		–			29,285
Obligations related to assets sold under repurchase agreements and securities loaned (2), (3)		215,814		19,396		20,606		376		1,492		4,971		–		–		11,576			274,231
Derivatives		4,467		11,553		4,423		3,355		2,709		11,900		20,985		50,396		139			109,927
Other financial liabilities (3)		34,768		2,187		1,140		477		430		851		2,180		10,994		563			53,590
Subordinated debentures		–		–		–		–		–		205		110		9,552		–			9,867
Total financial liabilities		374,666		84,653		92,001		47,626		41,950		52,327		110,204		101,669		602,307			1,507,403
Other non-financial liabilities		1,053		5,395		209		212		193		951		1,010		11,910		9,445			30,378
Equity		–		–		–		–		–		–		–		–		86,767			86,767
Total liabilities and equity	$	375,719	$	90,048	$	92,210	$	47,838	$	42,143	$	53,278	$	111,214	$	113,579	$	698,519		$	1,624,548
Off-balance sheet items
Financial guarantees	$	401	$	1,745	$	2,186	$	3,137	$	3,004	$	700	$	4,529	$	1,383	$	56		$	17,141
Commitments to extend credit		5,285		4,803		14,821		16,163		12,306		45,633		161,524		16,876		4,828			282,239
Other credit-related commitments		1,982		903		1,634		1,745		1,400		260		623		10		78,768			87,325
Other commitments		7		14		20		20		20		82		209		344		551			1,267
Total off-balance sheet items	$	7,675	$	7,465	$	18,661	$	21,065	$	16,730	$	46,675	$	166,885	$	18,613	$	84,203		$	387,972
(1)	Trading debt securities classified as FVTPL have been included in the less than 1 month category as there is no expectation to hold these assets to their contractual maturity.
---	---
(2)	Open reverse repo and repo contracts, which have no set maturity date and are typically short term, have been included in the with no specific maturity category.
---	---
(3)	Amounts previously presented were reclassified to reflect the contractual maturities of certain financial assets and liabilities.
---	---
(4)	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 section.
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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, 2021
---	---	---	---	---	---	---	---	---	---	---	---	---
(Millions of Canadian dollars)	On<br> demand		Within<br> 1 year		1 year<br> to 2 years		2 years<br> to 5 years		5 years<br> and greater		Total
Financial liabilities
Deposits <br>(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 <br>(2)	$	16,867	$	–	$	–	$	–	$	–	$	16,867
Other commitments <br>(3)		–		81		82		209		344		716
Commitments to extend credit <br>(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
	As at October 31, 2020
(Millions of Canadian dollars)	On<br> demand		Within<br> 1 year		1 year<br> to 2 years		2 years<br> to 5 years		5 years<br> and greater		Total
Financial liabilities
Deposits <br>(1), (4)	$	510,849	$	350,298	$	34,618	$	85,198	$	29,832	$	1,010,795
Other
Acceptances		9		18,609		–		–		–		18,618
Obligations related to securities sold short		–		29,121		–		–		–		29,121
Obligations related to assets sold under repurchase agreements and securities loaned <br>(4)		11,576		257,684		4,971		–		–		274,231
Other liabilities		199		37,681		188		358		8,678		47,104
Lease liabilities		–		633		604		1,545		2,575		5,357
Subordinated debentures		–		–		205		110		9,552		9,867
		522,633		694,026		40,586		87,211		50,637		1,395,093
Off-balance sheet items
Financial guarantees <br>(2)	$	17,141	$	–	$	–	$	–	$	–	$	17,141
Other commitments <br>(3)		–		81		82		209		344		716
Commitments to extend credit <br>(2)		239,212		43,025		2		–		–		282,239
		256,353		43,106		84		209		344		300,096
Total financial liabilities and off-balance sheet items	$	778,986	$	737,132	$	40,670	$	87,420	$	50,981	$	1,695,189
*	This table represents an integral part of our 2021 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.
---	---
(4)	Amounts previously presented were reclassified to reflect the contractual maturities of certain financial liabilities.
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Insurance risk

Insurance risk refers to the potential financial loss that may arise where the amount, timing and/or frequency of benefit and/or premium payments under insurance and reinsurance contracts are different than expected. Insurance risk is distinct from those risks covered by other parts of our risk management framework (e.g., credit, market and operational risk) where those risks are ancillary to, or accompany, the risk transfer. The five insurance sub-risks are: morbidity, mortality, longevity, policyholder behaviour (lapse), and travel risk.

Our Insurance Risk Management Framework provides an overview of our processes and tools for identifying, assessing, managing, mitigating and reporting on the insurance risks that face the organization. These are also supported by our robust three lines of defence governance structure, which is consistent with our Enterprise Risk Management Framework.

Operational/regulatory compliance risk drivers
Operational risk
---

Operational risk is the risk of loss or harm resulting from people, inadequate or failed internal processes, controls and systems or from external events. Operational risk is inherent in all of our activities and third-party activities and failure to manage operational risk can result in direct or indirect financial loss, reputational impact or regulatory scrutiny and proceedings in the various jurisdictions where we operate.

Our management of operational risk follows the three lines of defence governance model, encompassing the organizational roles and responsibilities for a coordinated enterprise-wide approach. For further details, refer to the Risk management – Enterprise risk management section.

Operational risk framework

We have an Enterprise Operational Risk Framework which sets out the processes to identify, assess, monitor, measure, report and communicate on operational risk. The processes are established through the following:

•	Risk identification and assessment tools, including the collection and analysis of risk event data, help risk owners understand and proactively manage operational risk exposures. Risk assessments are intended to ensure alignment between risk exposures and efforts to manage them. Management uses outputs of these tools to make informed risk decisions.
•	Risk monitoring tools alert management to changes in the operational risk profile. When paired with escalation and monitoring triggers, risk monitoring tools can identify risk trends, warn management of risk levels that approach or exceed defined limits, as well as prompt actions and mitigation plans to be undertaken.
---	---
•	Risk capital measurement provides credible estimation of potential risk exposure, including surfaces risk vulnerabilities, and informs strategic and capital planning decisions, which are ultimately intended to ensure that the bank is sufficiently resilient to withstand operational risk losses both in normal times and under stress situations.
---	---
•	Risk reporting and communication processes ensure that relevant operational risk information is made available to management in a timely manner to support risk-informed business decisions.
---	---

Conclusions from our operational risk programs enable learning based on what has happened to us, whether it could happen elsewhere in the organization, and what controls we need to amend or implement. These conclusions support the articulation of our operational risk appetite and are used to inform the overall level of operational risk exposure which thereby defines our operational risk profile. This profile includes significant operational risk exposures, potential new and emerging exposures and trends, and overall conclusions on the control environment and risk outlook. We proactively identify and investigate corporate insurance opportunities to mitigate and reduce potential future impacts of operational risk.

We consider the potential risks and rewards of our decisions to strike a balance between accepting potential losses versus incurring costs of mitigation, the expression of which is in the form of our operational risk appetite. Our operational risk appetite is established at the Board level and cascaded throughout each of our business segments.

Management reports have been implemented at various levels to support proactive management of operational risk and transparency of risk exposures. These reports are provided to senior management on a regular basis and provide detail on the main drivers of the risk status and trend for each of our business segments and the bank overall. In addition, changes to the operational risk profile that are not aligned to our business strategy or operational risk appetite are identified and discussed at GRC and the Risk Committee of the Board.

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Our operations expose us to many different operational risks, which may adversely affect our businesses and financial results. The following list is not exhaustive, as other factors could also adversely affect our results.

Operational risk	Management strategy
Cybersecurity risk<br> <br><br> <br>	Cybersecurity risk is the risk to the business associated with cyber-attacks initiated to disrupt or disable our operations or to expose or damage data. We have a dedicated team of technology and cybersecurity professionals that manage a comprehensive program to help protect the organization against breaches and other incidents by ensuring appropriate security and operational controls are in place. We continue to strengthen our cyber-control framework and to improve our resilience and cybersecurity capabilities including 24 hour monitoring, cyber intelligence analysis of internal and external threats and alerting of potentially suspicious security events and incidents. Throughout the year, we continued to invest in our cybersecurity program, and multiple scenarios, assessments and simulations were conducted to test our resiliency strategy.
Data management and privacy risk<br> <br><br> <br>	Data management risk is the risk of failing to manage information appropriately throughout its lifecycle due to inadequate processes and controls, resulting in legal or regulatory consequences, reputational damage or financial loss. Privacy risk is the risk of improper creation or collection, use, disclosure, retention or destruction of information. The collection, use and sharing of data, as well as the management and governance of data, are increasingly important as we continue to invest in digital solutions and innovation, as well as, expanding our business activities. This is also reflected through regulatory developments relating to data privacy. The Chief Privacy Office and the Chief Data Office partner with cross-functional teams to develop and implement enterprise-wide standards and practices that describe how data is used, protected, managed and governed.
Money laundering and Terrorist financing risk<br> <br><br> <br>	Money laundering and Terrorist financing risk is the risk that our products and services are used to facilitate the laundering of proceeds of crime, including the financing of terrorist activity. We maintain an enterprise-wide program designed to deter, detect and report suspected money laundering and terrorist financing activities across our organization, while seeking to ensure compliance with the laws and regulations of the various jurisdictions in which we operate. Our Global AML Compliance Group is dedicated to the continuous development and maintenance of robust policies, guidelines, training and risk-assessment tools and models to help our employees deal with ever-evolving money laundering and terrorist financing risks. The global anti-money laundering/anti-terrorist financing program is regularly evaluated in an effort to ensure it remains aligned with industry standards, best practices and all applicable laws, regulations and guidance. Risks of non-compliance include enforcement actions, criminal prosecutions and reputational damage.
Third-party risk<br> <br><br> <br>	Third-party risk is the risk of failure to effectively manage third parties which may expose us to service disruptions, regulatory action, financial loss, litigation or reputational damage. We have a risk-based enterprise-wide program designed to provide oversight for third-party relationships that enables us to respond effectively to events that can cause service disruptions, financial loss or various other risks that could impact us. Our approach to third-party risk mitigation is outlined in policies and standards that establish the minimum requirements for identifying and managing risks throughout the engagement with a third party, while ensuring compliance with global regulatory expectations. We monitor third-party providers that we consider critical to our operations for any impact on their ability to deliver services to us, including vendors of our <br>third-party<br> providers.
Business continuity risk<br> <br><br> <br>	Business continuity risk is the risk of being unable to maintain, continue or restore essential business operations during and/or after an event that prevents us from conducting business in the normal course. Exposure to disruptive operational events interrupts the continuity of our business operations and could negatively impact our financial results, reputation, client outcomes and/or result in harm to our employees. These operational events could result from the impact of severe weather, pandemics, failed processes, technology failures or cyber threats. Our risk-based enterprise-wide business continuity management program considers multiple scenarios to address the consequences of a disruption and its effects on the availability of our people, processes, facilities, technology, and third-party arrangements. Our approach to business continuity management is outlined in policies and standards embedded across the organization and the related risks are regularly measured, monitored, reported and integrated in our operational risk management and control framework.

Operational risk capital

Requirements for operational risk capital are determined in accordance with OSFI issued guidelines. Currently, our operational risk capital is assessed using the Standardized Approach (TSA) which is a formula-based calculation predicated on gross income. Upon implementation of final Basel III reforms, OSFI will require deposit-taking institutions to adopt a new Standardized Approach (SA) for measurement of operational risk capital. The SA methodology is based on the Business Indicator Component (BIC), which is a financial statement-based proxy for operational risk, and the Internal Loss Multiplier, a scaling factor that is based on the historical internal loss average relative to the BIC. Once implemented, SA will replace TSA. For further details on operational risk capital, refer to the Capital management section.

Operational risk loss events

As at October 31, 2021, our operational risk losses remain within our risk appetite. For further details on our contingencies, including litigation, refer to Notes 23 and 24 of our 2021 Annual Consolidated Financial Statements.

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Regulatory compliance risk

Regulatory compliance risk is the risk of potential non-conformance with laws, rules, regulations and prescribed practices in any jurisdiction in which we operate. Issues regarding compliance with laws and regulations can arise in a number of areas in large complex financial institutions, such as ourselves, and are often the result of inadequate or failed internal processes, controls, people or systems. We currently are, and may be at any given time, subject to a number of legal and regulatory proceedings and subject to numerous governmental and regulatory examinations, investigations and other inquiries.

Laws and regulations are in place to protect the financial and other interests of our clients, investors and the public. As a large-scale global financial institution, we are subject to numerous laws and extensive and evolving regulation by governmental agencies, supervisory authorities and self-regulatory organizations in Canada, the U.S., the U.K., Europe and other jurisdictions in which we operate. Such regulation continues to become increasingly extensive and complex. In addition, regulatory scrutiny and expectations in Canada, the U.S., the U.K., Europe and other jurisdictions for large financial institutions with respect to, among other things, governance, risk management practices and controls, and conduct, as well as the enforcement of regulatory compliance matters, has intensified. Failure to comply with these regulatory requirements and expectations or to resolve any identified deficiencies could result in increased regulatory oversight and restrictions. Resolution of such matters can also result in the payment of substantial penalties, agreements with respect to future operation of their business, actions with respect to relevant personnel, admission of wrongdoing, and guilty pleas with respect to criminal charges.

Operating in this increasingly complex regulatory environment and intense regulatory enforcement environment, we are and have been subject to a variety of legal proceedings, including civil claims and lawsuits, criminal charges, regulatory scrutiny, examinations and proceedings, investigations, audits and requests for information by various governmental regulatory agencies and law enforcement authorities in various jurisdictions, and we anticipate that our ongoing business activities will give rise to such matters in the future. The global scope of our operations also means that a single issue may give rise to overlapping regulatory investigations, regulatory proceedings and or civil litigation claims in different jurisdictions. RBC can be subject to such proceedings due to alleged violations of law or, if determined by regulators, allegedly inadequate policies, procedures, controls or remediation of deficiencies. Changes to laws, including tax laws, regulations or regulatory policies, as well as the changes in how they are interpreted, implemented or enforced, could adversely affect us, for example, by lowering barriers to entry in the businesses in which we operate, increasing our costs of compliance, or limiting our activities and ability to execute our strategic plans. In addition, the severity of the remedies sought in legal and regulatory proceedings to which RBC is subject have increased. Further, there is no assurance that we always will be, or be deemed to be, in compliance with laws, regulations or regulatory policies or expectations. Accordingly, it is possible that we could receive a judicial or regulatory enforcement judgment or decision that results in significant fines, damages, penalties, and other costs or injunctions, criminal convictions, or loss of licenses or registrations that would damage our reputation, and negatively impact our earnings and ability to conduct some of our businesses. We are also subject to litigation arising in the ordinary course of our business and the adverse resolution of any litigation could have a significant adverse effect on our results or could give rise to significant reputational damage, which in turn could impact our future business prospects.

Our Regulatory Compliance Management Framework outlines how we manage and mitigate the regulatory compliance risks associated with failing to comply with, or adapt to, current and changing laws and regulations in the jurisdictions in which we operate.

Regulatory compliance risk includes the regulatory risks associated with financial crimes (which include, but are not limited to, money laundering, bribery, and sanctions), privacy, market conduct, consumer protection, business conduct, as well as prudential and other generally applicable non-financial requirements. Specific compliance policies, procedures and supporting frameworks have been developed to manage regulatory compliance risk.

Strategic risk drivers
Strategic risk
---

Strategic risk is the risk that the enterprise or particular business areas will make inappropriate strategic choices, or will be unable to successfully implement selected strategies or achieve the expected benefits. Business strategy is a major driver of our risk appetite and consequently the strategic choices we make in terms of business mix determine how our risk profile changes.

Responsibility for selecting and successfully implementing business strategies is mandated to the individual heads of each business segment. Oversight of strategic risk is the responsibility of the heads of the business segments and their operating committees, the Enterprise Strategy group, the GE, and the Board. The Enterprise Strategy group supports the management of strategic risk through the strategic planning process, articulated within our Enterprise Strategic Planning Policy, ensuring alignment across our business, financial, capital and risk planning.

Our annual business portfolio review and project approval request processes help to identify and mitigate strategic risk by ensuring strategies for new initiatives, lines of business, and the enterprise as a whole align with our risk appetite and risk posture. GRM provides oversight of strategic risk by providing independent reviews of these processes, establishing enterprise risk frameworks, and independently monitoring and reporting on the level of risk established against our risk appetite metrics in accordance with the three lines of defence governance model.

For details on the key strategic priorities for our business segments, refer to the Business segment results section.

Reputation risk

Reputation risk is the risk of an adverse impact on stakeholders’ perception of the bank due to i) the actions or inactions of the bank, its employees, third-party service providers, or clients, ii) the perceived misalignment of these actions or inactions with stakeholder expectations of the bank, or iii) negative public sentiment towards a global or industry issue. Our reputation is rooted in the perception of our stakeholders, and the trust and loyalty they place in us is core to our purpose as a financial services organization. A strong and trustworthy reputation will generally strengthen our market position, reduce the cost of capital, increase shareholder value, strengthen our resiliency, and help attract and retain top talent. Conversely, damage to our reputation can result in reduced share price and market capitalization, increased cost of capital, loss of strategic flexibility,

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inability to enter or expand into markets, loss of client loyalty and business, regulatory fines and penalties, restrictive agreements with regulators or prosecutors, or criminal prosecutions. The sources of reputation risk are widespread; risk to our reputation can occur in connection with credit, regulatory, legal and operational risks. We can also experience reputation risk from a failure to maintain an effective control environment, exhibit good conduct and maintain appropriate culture practices.

Managing our reputation risk is an integral part of our organizational culture and our overall enterprise risk management approach, as well as a priority for employees and our Board. Our Board-approved Reputation Risk Management Framework provides an overview of our approach to identify, assess, manage, monitor and report on reputation risk. This framework outlines governance authorities, roles and responsibilities, and controls and mechanisms to manage our reputation risk, including our culture of integrity, compliance with our Code of Conduct and operating within our risk appetite.

Our governance of reputation risk aims to be holistic and provides an integrated view of potential reputation issues across the organization. This governance structure is designed to ensure that ownership and accountability for reputation risk are understood across the enterprise, both proactive and reactive reputation risk decisions are escalated to senior management for review and evaluation, and reporting on reputation risk is comprehensive and integrated.

Legal and regulatory environment risk

Legal and regulatory environment risk is the risk that new or modified laws and regulations, and the interpretation or application of laws and regulations, will negatively impact the way in which we operate, both in Canada and in the other jurisdictions in which we conduct business. The full impact of some of these changes on our business will not be known until final rules are implemented and market practices have developed in response. We continue to respond to these and other developments and are working to minimize any potential adverse business or economic impact. The following provides a high-level summary of some of the key regulatory changes that have potential to increase or decrease our costs, impact our profitability and increase the complexity of our operations. A summary of the additional regulatory changes instituted by governments globally and by OSFI in response to the COVID-19 pandemic are included in the Impact of COVID-19 pandemic and Capital management sections of this 2021 Annual Report.

Global uncertainty

Significant uncertainty about the impacts of the COVID-19 pandemic, supply chain disruptions, trade policy and geopolitical tensions continue to pose risks to the global economic outlook. In October 2021, the International Monetary Fund (IMF) projected global growth of 5.9% in calendar 2021, down 0.1% from its July forecast, reflecting supply chain disruptions in advanced economies and limited vaccine access in developing countries. Despite largely positive economic developments throughout the year, uncertainty remains regarding new variants of COVID-19 and the potential impacts of uneven vaccine access and vaccine hesitancy. Trade policy also remains a source of global uncertainty as countries consider ways to incorporate climate policy into trade policy and the U.K. continues to develop its post-Brexit international trade policies. Finally, global financial markets remain vulnerable to geopolitical tensions, such as those between the U.S. and China, many of which center around trade and technology. Our diversified business model, as well as our product and geographic diversification, continue to help mitigate the risks posed by global uncertainty.

Consumer protection

On August 18, 2021, the Canadian federal government published the Financial Consumer Protection Framework Regulations which are the underlying regulations to support the new Financial Consumer Protection Framework (FCPF). The FCPF encompasses a number of new consumer protection requirements, including complaint handling, access to banking services, and disclosures. We will be required to comply with the regulations by June 30, 2022 and we expect to be in compliance by the effective date.

Minimum qualifying rates for insured and uninsured mortgages in Canada

Effective June 1, 2021, the proposed minimum qualifying rate for uninsured mortgages is the greater of the mortgage contract rate plus 2% or 5.25%. OSFI also announced that it will review and communicate the qualifying rate at a minimum annually, every December. The Department of Finance Canada, who is responsible for setting the benchmark rate for qualifying insured mortgages, also announced that it would align the rate for insured mortgages with the rate set by OSFI for uninsured mortgages and that this new rate would apply to insured mortgages approved on June 1, 2021 or later. The minimum qualifying rate for insured mortgages will be subject to review and periodic adjustment.

Interest rate benchmark reform

London Interbank Offered Rate (LIBOR) is the most widely referenced benchmark interest rate across the globe for derivatives, bonds, loans and other floating rate instruments; however, there is a regulator-led push to transition the market away from LIBOR and certain other benchmark rates to alternative benchmark rates (ABRs) that are based on actual overnight transactions.

On March 5, 2021, the Financial Conduct Authority (FCA), the regulator of the ICE Benchmark Administration (IBA) which administers LIBOR, announced the permanent cessation or loss of representativeness of all 35 LIBOR benchmark settings currently published by the IBA as of December 31, 2021 or June 30, 2023.

Details related to certain settings to which we are exposed are noted below.

•

Publication of the 1-week and 2-month USD LIBOR settings will cease immediately after December 31, 2021. Publication of the overnight and 12-month USD LIBOR settings will cease immediately after June 30, 2023, while the 1-month, 3-month and 6-month USD LIBOR settings will no longer be representative of the underlying market and economic reality they are intended to measure after June 30, 2023. The FCA may consult on requiring the IBA to publish 1-month, 3-month and 6-month USD LIBOR settings after the end of June 2023 on a non-representative “synthetic” basis.

•

Publication of the overnight, 1-week, 2-month and 12-month GBP LIBOR settings will cease immediately after December 31, 2021, while the 1-month, 3-month and 6-month GBP LIBOR settings will no longer be representative of the underlying market and economic reality they are intended to measure after December 31, 2021. The FCA will require the IBA to continue to publish 1, 3 and 6 month GBP LIBOR settings until the end of 2022 on a non-representative “synthetic” basis.

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The FCA announcement engaged contractual triggers for the calculation and future application of fallback provisions related to our LIBOR linked products, including certain loans, bonds and derivatives.

Additionally, on June 22, 2021, OSFI issued a letter setting out their expectation that Federally Regulated Financial Institutions (FRFIs) will stop using USD LIBOR settings as soon as possible and will not enter into new transactions referencing these rates after December 31, 2021. OSFI further expects FRFIs to prioritize system and model updates to accommodate ABRs by December 31, 2021, and be fully prepared to transact in ABRs that are available in markets in which the FRFI operates by December 31, 2021.

To manage our transition away from LIBOR, we have implemented a comprehensive enterprise-wide program and governance structure that addresses the key areas of impact including contract remediation, funding and liquidity planning, risk management, financial reporting and valuation, systems, processes and client education and communication. Transition activities are focused on two broad streams of work: (i) developing new ABR linked products, and (ii) conversion of existing LIBOR based contracts to ABRs. Our program timelines are ultimately dependent on broader market acceptance of products that reference the new ABRs and our clients’ readiness and ability to adopt the replacement products. Significant matters that we continue to evaluate include client product offerings, short and long-term funding strategies, and our hedging programs. We continue to work towards the recommended target dates for the cessation of LIBOR-based products provided by our regulators and are on track with our transition activities to move to ABRs.

For further details, refer to the Critical accounting policies and estimates section in this 2021 Annual Report and Note 2 of our 2021 Annual Consolidated Financial Statements.

Client Focused Reforms

The Canadian Securities Administrators published amendments to National Instrument 31-103 to implement the Client Focused Reforms (Reforms), which are intended to increase the standard of conduct required for Canadian securities registrants. The Reforms enhance core requirements relating to conflicts of interest, suitability, know-your-product and know-your-client requirements, and also introduce new requirements relating to relationship disclosure, training and recordkeeping. The changes are coming into effect in two phases: the first phase relating to conflicts of interest and the related disclosure requirements came into effect on June 30, 2021, and the second phase relating to the remaining requirements comes into effect on December 31, 2021. The requirements primarily impact our Personal & Commercial Banking and Wealth Management platforms. We are well positioned to comply with the requirements.

U.S. regulatory initiatives

Policymakers continue to evaluate and implement reforms to various U.S. financial regulations, which could result in either expansion or reduction to the U.S. regulatory requirements and associated changes in compliance costs. On January 1, 2021, the U.S. Congress enacted the Anti-Money Laundering Act of 2020 (AMLA) which represents a comprehensive set of reforms to U.S. anti-money laundering laws. Regulations pertaining to this legislation have yet to be issued; the extent, timing and impact of which are unknown at this time. We will continue to monitor developments and any resulting implications for us.

U.K. and European regulatory reform

EU Sustainability-Related Disclosures Regulation requires financial services firms to disclose their approaches to considering environmental, social and governance factors as part of their advice and investment decision processes. These requirements were effective on March 10, 2021 and to date there has been no material impact on us; however, we will continue to monitor future guidance and the impact, if any, on us.

For further details on regulatory capital and related requirements, refer to the risk and Capital management sections of this 2021 Annual Report.

Competitive risk

Competitive risk is the risk of an inability to build or maintain a sustainable competitive advantage in a given market or markets, and includes the potential for loss of market share due to competitors offering superior products and services. Competitive risk can arise within or outside the financial sector, from traditional or non-traditional competitors, domestically or globally. There is intense competition for clients among financial services companies in the markets in which we operate. Client loyalty and retention can be influenced by a number of factors, including new technology used or services offered by our competitors, relative service levels and prices, product and service attributes, our reputation, actions taken by our competitors, and adherence with competition and anti-trust laws. Other companies, such as insurance companies and non-financial companies, as well as new technological applications, are increasingly offering services traditionally provided by banks. This competition could also reduce our revenue which could adversely affect our results.

We identify and assess competitive risks as part of our overall risk management process. Our products and services are regularly benchmarked against existing and potential competitors. In addition, we regularly conduct risk reviews of our products, services, mergers and acquisitions strategy, as well as we seek to ensure adherence to competition and anti-trust laws. Our annual strategy-setting process also plays an integral role in managing competitive risk.

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Macroeconomic risk drivers
Systemic risk
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Systemic risk is the risk that the financial system as a whole, or a major part of it – either in an individual country, a region, or globally – is put in real and immediate danger of collapse or serious damage due to an unforeseen event causing a substantive shock to the financial system with the likelihood of material damage to the economy, and which would result in financial, reputation, legal or other risks for us.

Systemic risk is considered to be the least controllable risk facing us, leading to increased vulnerabilities as experienced during the 2008 global financial crisis and the COVID-19 pandemic. Our ability to mitigate systemic risk when undertaking business activities is limited, other than through collaborative mechanisms between key industry participants, and, as appropriate, the public sector and regulators to reduce the frequency and impact of these risks. The two most significant measures in mitigating the impact of systemic risk are diversification and stress testing.

Our diversified business model, portfolios, products, activities and funding sources help mitigate the potential impacts from systemic risk as well as having established risk limits to ensure our portfolio is diversified, and concentration risk is reduced and remains within our risk appetite.

Stress testing involves consideration of the simultaneous movements in a number of risk factors. It is used to ensure our business strategies and capital planning are robust by measuring the potential impacts of credit, market, liquidity, and operational risks on us, under adverse economic conditions. Our enterprise-wide stress testing program evaluates the potential effects of a set of specified changes in risk factors, corresponding to exceptional but plausible adverse economic and financial market events. These stress scenarios are evaluated across the organization, and results are integrated to develop an enterprise-wide view of the impacts on our financial results and capital requirements. For further details on our stress testing, refer to the Enterprise risk management section.

Our financial results are affected by the business and economic conditions in the geographic regions in which we operate. These conditions include consumer saving and spending habits as well as consumer borrowing and repayment patterns, business investment, government spending, exchange rates, sovereign debt risks, the level of activity and volatility of the capital markets, strength of the economy and inflation. Given the importance of our Canadian and U.S. operations, an economic downturn may largely affect our personal and business lending activities and may result in higher provisions for credit losses. Deterioration and uncertainty in global capital markets could result in continued high volatility that would impact results in Capital Markets, while in Wealth Management weaker market conditions could lead to lower average fee-based client assets and transaction volumes. In addition, worsening financial and credit market conditions may adversely affect our ability to access capital markets on favourable terms and could negatively affect our liquidity, resulting in increased funding costs and lower transaction volumes in Capital Markets and Investor & Treasury Services.

Our financial results are also sensitive to changes in interest rates. Central banks globally reduced benchmark interest rates in 2020, largely in response to the impact of the COVID-19 pandemic in an effort to provide support to maintain the resilience and stability of the financial systems. With interest rates remaining low throughout 2021, and expected to continue to remain low into fiscal 2022, we could see net interest income continuing to be unfavourably impacted by spread compression across many of our businesses while an increase in interest rates would benefit our businesses. However, a significant increase in interest rates could also adversely impact household balance sheets, leading to credit deterioration which could negatively impact our financial results, particularly in some of our Personal & Commercial Banking and Wealth Management businesses.

Overview of other risks

In addition to the risks described in the risk sections, there are other risk factors, described below, which may affect our businesses and financial results. The following discussion is not exhaustive as other factors could also adversely affect our results.

Government fiscal, monetary and other policies

Our businesses and earnings are affected by monetary policies that are adopted by the BoC, the Fed in the U.S., the ECB in the EU and monetary authorities in other jurisdictions in which we operate, as well as the fiscal policies of the governments of Canada, the U.S., Europe and such other jurisdictions. Such policies can also adversely affect our clients and counterparties in Canada, the U.S. and internationally, which may increase the risk of default by such clients and counterparties.

Tax risk and transparency

Tax risk refers to the risk of loss related to unexpected tax liabilities. The tax laws and systems that are applicable to us are complex and wide-ranging. As a result, we ensure that any decisions or actions related to tax always reflect our assessment of the long-term costs and risks involved, including their impact on our reputation and our relationship with clients, shareholders, and regulators.

Our approach to taxation is grounded in principles which are reflected in our Code of Conduct, is governed by our Enterprise Tax Risk Management Policy, and incorporates the fundamentals of our risk drivers. Oversight of our tax policy and the management of tax risk is the responsibility of the GE, the CFO and the Senior Vice President, Taxation. We discuss our tax strategy with the Audit Committee annually and provide updates on our tax position on a regular basis.

Our tax strategy is designed to provide transparency and support our business strategy, and is aligned with our corporate vision and values. We seek to maximize shareholder value by structuring our businesses in a tax-efficient manner while considering reputational risk by being in compliance with all laws and regulations. Our policy requires that we:

•	Act with integrity and in a straightforward, open and honest manner in all tax matters;
•	Ensure tax strategy is aligned with our business strategy supporting only bona fide transactions with a business purpose and economic substance;
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•	Ensure all intercompany transactions are conducted in accordance with applicable transfer pricing requirements;
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•	Ensure our full compliance and full disclosure to tax authorities of our statutory obligations; and
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•	Endeavour to work with the tax authorities to build positive long-term relationships and where disputes occur, address them constructively.
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With respect to assessing the needs of our clients, we consider a number of factors including the purpose of the transactions. We seek to ensure that we only support bona fide client transactions with a business purpose and economic substance. Should we become aware of client transactions that are aimed at evading their tax obligations, we will not proceed with the transactions.

We operate in 29 countries worldwide. Our activities in these countries are subject to both Canadian and international tax legislation and other regulations, and are fully disclosed to the relevant tax authorities. The Taxation group and GRM both regularly review the activities of all entities in an effort to ensure compliance with tax requirements and other regulations.

Given that we operate globally, complex tax legislation and accounting principles have resulted in differing legal interpretations between the respective tax authorities we deal with and ourselves, and we are at risk of tax authorities disagreeing with prior positions we have taken for tax purposes. When this occurs, we are committed to an open and transparent dialogue with the tax authorities to facilitate a quick assessment and prompt resolution of the issues where possible. Failure to adequately manage tax risk and resolve issues with tax authorities in a satisfactory manner could adversely impact our results, potentially to a material extent in a particular period, and/or significantly impact our reputation.

Tax contribution

In 2021, total income and other tax expense, including income taxes in the Consolidated Statements of Comprehensive Income and Changes in Equity, to various levels of governments globally totalled $8 billion (2020 – $4 billion). In Canada, total income and other tax expense for the year ended October 31, 2021 to various levels of government totalled $7 billion (2020 – $3 billion).

For further details on income and other tax expense, refer to the Financial performance section.

Environmental and social risk

Environmental and Social (E&S) risk is the potential for an E&S issue associated with us, a client, transaction, product, supplier or activity, to have a negative impact on our financial position, operations, legal and regulatory compliance, or reputation. E&S issues include, but are not limited to, site contamination, waste management, land and resource use, biodiversity, water quality and availability, climate change, environmental regulation, human rights (including, but not limited to, Indigenous Peoples’ rights), and community engagement. GRM is responsible for developing and maintaining policies to identify, assess, monitor and report on E&S risk, and to regularly review and update E&S risk policies. These policies seek to identify sectors, clients and business activities that may expose us to E&S risk, establish requirements to manage, mitigate and monitor E&S risk, including when to apply enhanced due diligence and escalation procedures. Business segments and functional areas are responsible for incorporating E&S risk management requirements within their operations.

We recognize the importance of E&S risk management practices and processes and are committed to regular and transparent disclosures. Global practices in the identification, assessment and management of climate-related risks and opportunities are rapidly evolving. We are working to advance our climate risk measurement, management, monitoring and reporting capabilities and to advance our understanding of the impact climate-related risks may have on our business and our clients’ businesses. The TCFD Disclosure section below discusses our participation in climate initiatives and industry working groups. In addition, as a signatory to the Equator Principles (EP), we report annually on projects assessed according to the EP framework. RBC Global Asset Management (GAM) 1 and BlueBay Asset Management LLP are signatories to the United Nations Principles for Responsible Investment (UN PRI) and report annually on their responsible investment activities to the UN PRI. RBC Europe Limited (RBCEL), a wholly owned subsidiary of the bank, is a member of the Green Bond Principles and reports annually on its green bond underwriting activities. Our annual ESG Performance Report provides disclosure on our approach and performance towards addressing significant E&S and human rights issues. We published our Human Rights Position Statement in October 2020, recognizing the need to consider human rights impacts in our business activities. The Human Rights Position Statement sets out our commitment to respect internationally-recognized human rights in line with the United Nations Guiding Principles on Business and Human Rights. We also publish an annual Modern Slavery Act Statement, which sets out the policies and processes that are in place to prevent slavery and human trafficking from taking place in our operations and supply chains, and climate-related disclosures that consider the recommendations of the FSB’s Task Force on Climate-related Financial Disclosures (TCFD).

We also continue to explore opportunities to expand the products and services we provide to respond to the evolving ESG landscape, help our clients navigate the transition to a net-zero economy, and advance their sustainability strategies. The TCFD Disclosure section below discusses a number of products and services that we provide to respond to climate-related opportunities and these offerings also often address broader ESG-related considerations.

1	RBC GAM includes the following affiliates: BlueBay Asset Management LLP (BlueBay), RBC Global Asset Management Inc. (including Phillips, Hager & North Investment Management), RBC Global Asset Management (U.S.) Inc., RBC Global Asset Management (UK) Limited, and RBC Global Asset Management (Asia) Limited, which are separate, but affiliated subsidiaries of RBC.

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TCFD Disclosure

Governance

The Board of Directors and its Committees oversee senior management, who is responsible for managing E&S risks and opportunities, which include climate change. The Board provides oversight of our strategic approach to climate change and our E&S risks, which includes how we manage climate-related risks and opportunities. Each of the four Committees of the Board, the Risk Committee, the Governance Committee, the Audit Committee and the Human Resources Committee, have oversight of climate-related risks and opportunities that are specific to their respective oversight responsibilities. The Board reviewed our updated climate strategy, RBC’s Climate Blueprint, in February 2021. The Board and its Committees also received reports on a range of climate change-related issues, which included our climate change strategy, climate risks including physical and transition risk in our enterprise-wide stress testing, measurement and reporting of emissions, the regulatory landscape and regulatory initiatives, increasing stakeholder focus, as well as our engagement with stakeholders. We have established a Climate Strategy Steering Committee and a Climate Strategy & Governance Team, focused on providing enterprise-wide strategic direction on advancing our understanding and developing strategies to address climate-related risks and opportunities for us and our clients. GRM has senior executive representation on the Climate Strategy Steering Committee and also has a dedicated E&S risk team that develops approaches to identify, assess, monitor and report on climate-related risks, as appropriate.

Strategy

We recognize we have a role to play in accelerating the transition to a net-zero economy and mitigating the risks associated with climate change. Our RBC Climate Blueprint outlines our climate strategy and includes our commitment to net-zero emissions in our lending by 2050, beginning with measuring and reporting our financed emissions for key sectors. Our enterprise strategy for addressing climate-related opportunities includes supporting our clients in the net-zero transition, advancing our capabilities in climate risk measurement and management, reducing emissions from our own operations, speaking up for smart climate solutions, and investing in technology to address complex environmental challenges. RBC GAM published its approach to climate change that lays out its commitments and actions related to climate change.

We are working to develop products, solutions and advice to assist our clients as they transition to a net-zero economy. In 2021, we committed to achieving $500 billion in sustainable financing by 2025, and we issued a 5-year US$750 million green bond, our second green bond offering and our first issuance through our Sustainable Bond Framework which was launched in 2020. Our participation in the rapidly evolving sustainable finance and green bond market helps to enable and advance the net-zero transition.

We are active participants in industry groups that support the development of strategies and plans to transition to a net-zero economy. In 2021:

•	We joined the Partnership for Carbon Accounting Financials (PCAF) and have begun work to measure and report our financed emissions for key sectors.
•	We joined RMI’s Center for Climate-Aligned Finance to convene stakeholders and advance progress on sector-based decarbonisation pathways.
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•	We pledged to join the Net-Zero Banking Alliance (NZBA) as part of a global, industry-led initiative to accelerate and support efforts to address climate change.
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Risk Management

We regard climate risk as a transverse risk, which impacts all the other risk categories for which we have established limits, and requires us to consider how financial and non-financial factors may impact us and our clients. We initially identified climate change as an emerging risk in 2017 and, as such, our approach to managing it is reported on a regular basis to senior management and to the Risk Committee of the Board. We define climate risk as risk related to the transition to a net-zero economy (transition risk) and risk related to the physical impacts of climate change (physical risk), which includes both chronic and acute risks. We continue to advance our capabilities and approach to climate risk management:

•	We conduct portfolio, client and scenario analyses to assess our exposure to, and the impact of, climate-related risks.
•	We participated in a climate scenario analysis pilot project with the Bank of Canada and OSFI to build our climate scenario analysis knowledge and understanding of our potential exposure to climate-related transition risks.
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•	We have committed to refining our climate risk appetite and setting interim reduction goals on our path to net-zero emissions in our lending by 2050.
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•	We are building out climate-related scenario analysis and stress testing capabilities. As part of our annual stress testing and analysis, we incorporated components of climate risk through transition and physical risk stresses and assessed its impact on our key portfolios.
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•	With the potential for climate risk to translate to increased credit risk, we have done work to identify those sectors within our wholesale portfolio that are most affected by physical and transition risk, which allows us to better focus ongoing monitoring of climate risk.
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As with risk appetite, as we continue to develop our climate risk measurement capabilities this will inform the steps we take to further the implementation of climate-related risk limits and advance the integration of climate risks into our policies and procedures.

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We may be exposed to climate risk through emerging regulatory and legal requirements, disruptions to our operations and services, and the products and services we provide to our clients. Both we and our clients may also be exposed to climate risk through technological and societal change and market forces, in addition to the factors outlined above. Additionally, we and our clients may also be vulnerable to physical climate risk. We regularly review the risks that we face and reflect on those that affect our clients, considering:

Emerging regulatory and legal requirements

• Climate change regulations, frameworks, and guidance that apply to banks, insurers and asset managers are rapidly evolving. Several central banks and regulators have taken steps towards introducing or have already introduced rules to address the financial and economic risks of climate change. As regulations and formal requirements evolve, we will monitor such developments and update our risk management practices and disclosures as necessary. • For clients in RBC’s Corporate Client Group and Capital Markets that are in sectors categorized as high environmental risk, such as those in carbon-intensive sectors, we evaluate whether clients have assessed and quantified the regulatory impacts of climate change as part of our due diligence and risk assessment process.

Disruptions to operations and client services

• We identify properties that we lease or own, which contain business processes and supporting applications that require enhanced facility infrastructure to mitigate site disruptions, such as those caused by extreme weather events. We classify critical environment sites based on our business risk tolerance for site-specific downtime and, among other things, site location, power supply, exposure to flooding, geological stability and other hazards. • We take steps to mitigate and adapt to climate change through our building design and our purchasing decisions. • As required, we assess the impact of climate-related events (e.g., floods, hurricanes) on our businesses and client operations.

Products and services we provide

• We maintain a diversified lending portfolio, which improves our resilience to geographic or sectoral downturns and minimizes concentrations of credit exposure. • Each business segment is responsible for identifying material climate-related risks and opportunities, which are integrated into risk management processes as necessary. • We deliver advice and solutions to our clients to support their transition to a net-zero economy and the advancement of their sustainability strategies. For example, we provide sustainable finance products such as green, social and sustainability bond underwriting, sustainability-linked bonds and loans as well as advisory services to integrate ESG factors for companies that are in the pre-initial public offering or pre-acquisition stage. In addition, our offerings include ESG-integrated investment solutions, structured products, carbon trading services, ESG research and thought leadership. • RBC GAM integrates material environmental, social and governance (ESG) factors in its investment processes to help mitigate risk and/or enhance long-term, risk-adjusted returns. • RBC Insurance ® (through its insurance agency) sells property and casualty insurance products that are underwritten and insured by Aviva Canada Inc. As such, RBC Insurance is not directly exposed to climate-related risks associated with these products. The property and casualty insurance industry as a whole has exposure to longer-term shifts in climate patterns, such as rising temperatures and hurricanes, which may indirectly impact our Insurance business results. We are working to advance our understanding of the impact of acute and longer term weather events on travel insurance, and for life and health insurance products sold to group/business clients.

Metrics & Targets

We have committed to net-zero emissions in our lending by 2050 and also have commitments associated with financing, investments, risk management and carbon reduction in our operations, research, partnerships, and philanthropy. Performance is reported on in our annual TCFD Report and in the RBC GAM TCFD Report. The first RBC GAM TCFD report was published in April 2021. We have commenced efforts to measure our financed emissions in accordance with the PCAF methodology. As a signatory to the Carbon Disclosure Project, we have publicly reported climate-related data since 2003, including multi-year data in accordance with the Greenhouse Gas (GHG) Protocol. We also receive third-party limited assurance on our energy and emissions metrics.

Other factors

Other factors that may affect our results include changes in government trade policy, changes in accounting standards and their effect on our accounting policies, estimates and judgments, currency and interest rate movements in Canada, the U.S., and other jurisdictions in which we operate or conduct business, changes to our credit ratings, the timely and successful development of new products and services, technological changes, effective design, implementation and execution of processes and their associated controls, fraud by internal and external parties, the possible impact on our business from disease or illness that affects local, national or global economies, disruptions to public infrastructure, including transportation, communication, power and water, international conflicts and other political developments and our success in anticipating and managing the associated risks.

We caution that the foregoing discussion of risk factors, many of which are beyond our control, is not exhaustive and other factors could also affect our results.

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Capital management

We actively manage our capital to maintain strong capital ratios and high ratings while providing strong returns to our shareholders. In addition to the regulatory requirements, we consider the expectations of credit rating agencies, depositors and shareholders, as well as our business plans, stress tests, peer comparisons and our internal capital ratio targets. Our goal is to optimize our capital usage and structure, and to provide support for our business segments and clients. We also aim to generate optimal returns for our shareholders, while protecting depositors and creditors.

Capital management framework

Our capital management framework establishes policies and processes for defining, measuring, raising and investing all forms of capital in a coordinated and consistent manner. It sets our overall approach to capital management, including guiding principles and roles and responsibilities relating to capital adequacy and transactions, dividends, solo capital and management of RWA and leverage ratio exposures. We manage and monitor capital from several perspectives, including regulatory capital and solo capital.

Our capital planning process is dynamic and involves various teams including Finance, Corporate Treasury, GRM, Economics and our businesses, and covers internal capital ratio targets, potential capital transactions as well as projected dividend payouts and share repurchases. This process considers our business operating plans, enterprise-wide stress testing and Internal Capital Adequacy Assessment Process (ICAAP), regulatory capital changes and requirements, accounting changes, internal capital requirements, rating agency metrics and solo capital.

Our capital plan is established on an annual basis and is aligned with the management actions included in the annual business operating plan, which includes forecast growth in assets and earnings taking into account our business strategies, the projected market and economic environment, and peer positioning. This includes incorporating potential capital transactions based on our projected internal capital generation, business forecasts, market conditions and other developments, such as accounting and regulatory changes that may impact capital requirements. All of the components in the capital plan are monitored throughout the year and are revised as deemed appropriate.

Our enterprise-wide stress testing and annual ICAAP processes provide key inputs for capital planning, including setting internal capital ratio targets. The stress scenarios are evaluated across the organization, and results are integrated to develop an enterprise-wide view of financial impacts and capital requirements, which in turn facilitate the planning of mitigating actions to absorb adverse events. ICAAP assesses capital adequacy and requirements covering all material risks, with a cushion for plausible contingencies. In accordance with OSFI guidelines, major components of our ICAAP process include comprehensive risk assessment, stress testing, capital assessment and planning, Board and senior management oversight, monitoring and reporting and internal control review.

Our internal capital targets are established to maintain robust capital positions in excess of OSFI’s Basel III regulatory targets. The results of our enterprise-wide stress testing and ICAAP processes are incorporated into the OSFI Capital Buffers, D-SIB/Globally Systemically Important Banks (G-SIB) surcharge, and Domestic Stability Buffer (DSB), with a view to ensure that the bank has adequate capital to underpin risks and absorb losses under all plausible stress scenarios, including the COVID-19 pandemic, given our risk profile and appetite. In addition, we include a discretionary cushion on top of OSFI’s regulatory targets to reflect our risk appetite, our forecasts of potential negative downturns and to maintain our capital strength for forthcoming regulatory and accounting changes, peer comparatives, rating agencies sensitivities and solo capital level.

The Board is responsible for the ultimate oversight of capital management, including the annual review and approval of the capital plan. ALCO and Group Executive (GE) share responsibility for capital management and receive regular reports detailing our compliance with approved limits and guidelines. The Audit and Risk Committees jointly approve the ICAAP process.

Basel III

Our consolidated regulatory capital requirements are determined by guidelines issued by OSFI, which are based on the minimum Basel III capital ratios adopted by the BCBS.

Under Basel III, banks select from two main approaches, the Standardized Approach (SA) or the IRB Approach, to calculate their minimum regulatory capital required to support credit, market and operational risks. We adopted the Basel III IRB approach to calculate credit risk capital for consolidated regulatory reporting purposes. While the majority of our credit risk exposures are reported under the Basel III IRB Approach for regulatory capital purposes, certain portfolios continue to use the Basel III Standardized Approach for credit risk (for example, our Caribbean Banking operations and City National). For consolidated regulatory reporting of market risk capital, we use both the Internal Models-based and Standardized Approaches, and for consolidated regulatory reporting of operational risk capital we use the Standardized Approach. We determine our regulatory leverage ratio based on OSFI’s Leverage Requirements (LR) Guideline, which reflects the BCBS Basel III leverage ratio requirements.

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All federally regulated banks with a Basel III leverage ratio total exposure exceeding € 200 billion at their financial year-end are required, at a minimum, to publicly disclose in the first quarter following their year-end, the twelve indicators used in the G-SIB assessment methodology, with the goal of enhancing the transparency of the relative scale of banks’ potential global systemic importance and data quality. The FSB publishes an updated list of G-SIBs annually. On November 23, 2021, we were re-designated as a G-SIB by the FSB. This designation requires us to maintain a higher loss absorbency requirement (common equity as a percentage of RWA) of 1% consistent with the D-SIB requirement.

On April 18, 2018, OSFI released its final guideline on Total Loss Absorbing Capacity (TLAC), which applies to Canadian D-SIBs as part of the Federal Government’s Bail-in regime. The guideline is consistent with the TLAC standard released on November 9, 2015 by the FSB for institutions designated as G-SIBs, but tailored to the Canadian context. The TLAC requirement is intended to address the sufficiency of a systemically important bank’s loss absorbing capacity in supporting its recapitalization in the event of its failure. TLAC is defined as the aggregate of Tier 1 capital, Tier 2 capital, and other TLAC instruments, which allow conversion in whole or in part into common shares under the CDIC Act and meet all of the eligibility criteria under the guideline.

TLAC requirements established two minimum standards, which are required to be met effective November 1, 2021: the risk-based TLAC ratio, which builds on the risk-based capital ratios described in the Capital Adequacy Requirements (CAR) guideline, and the TLAC leverage ratio, which builds on the leverage ratio described in OSFI’s LR guideline. As at October 31, 2021, our TLAC ratio of 25.7% was above the minimum TLAC ratio requirement of 24%, which includes the DSB requirement of 2.5% mentioned below, and our TLAC leverage ratio of 8.6% was above the minimum requirement of 6.75%. We do not anticipate any challenges in complying with these requirements.

OSFI requires all D-SIBs to publicly disclose their Pillar 2 DSB as part of their quarterly disclosures, similar to other current capital-related disclosure requirements. The level of the Pillar 2 buffer ranges between 0% and 2.5% of the entity’s total RWA for each of the six systemically important banks in Canada. The DSB requirements must be met at the CET1 capital level. OSFI undertakes a review of the DSB on a semi-annual basis, in June and December, and will publicly announce any changes at that time. However, on March 13, 2020, OSFI announced a decrease in the DSB from 2.25% to 1.0% of total RWA, with the buffer decrease effective immediately, in response to the disruption related to the COVID-19 pandemic and in support of the banks’ ability to supply additional credit to the economy. At that time, OSFI also committed to not increasing the DSB for a period of 18 months and also announced its expectation that all banks should not increase their dividend payments and should stop any share buybacks. On June 17, 2021, OSFI announced an increase in the DSB from 1.0% to 2.5% of total RWA effective October 31, 2021. The 2.5% reflects the highest DSB requirement under OSFI capital requirements. On November 4, 2021, OSFI announced that banks are permitted to increase their dividend payments and to execute share buybacks, once approved.

In Q2 2020, OSFI announced a series of regulatory adjustments and guidance to support the financial and operational resilience of the banking sector in response to the ongoing COVID-19 pandemic, and continues, as needed, to release regulations implementing, clarifying, updating or unwinding certain aspects or requirements. Such measures and guidance include:

•	Regulatory adjustments to RWA, including temporary measures to reduce stressed VaR multipliers from three to one and the permanent exclusion of Funding Valuation Adjustment hedges from market risk.
¡	Effective May 1, 2021, OSFI unwound the temporary measures to reduce SVaR multipliers, requiring banks to revert to pre-pandemic levels.
---	---
•	Modifications for increases in expected credit loss provisions on CET1 capital by applying a 70% after-tax exclusion rate for growth in Stage 1 and Stage 2 allowances between Q1 2020 and the respective quarters of fiscal 2020. The exclusion rate was reduced to the current 50% in fiscal 2021 and will be reduced to 25% in fiscal 2022. These modifications are not available for a financial institution’s IRB portfolio in any quarter in which the financial institution has a shortfall in allowances.
---	---
•	Exclusion of central bank reserves and sovereign-issued securities that qualify as HQLA from leverage ratio exposure amounts until December 31, 2021.
---	---
¡	On August 12, 2021, OSFI announced that the exclusion of sovereign-issued securities that qualify as HQLA from the leverage ratio exposure measure will not extend beyond December 31, 2021 and that central bank reserves will continue to be excluded from the leverage ratio exposure measure.
---	---
•	Reduction in the current regulatory capital floor for financial institutions using the IRB approach from 75% to 70% of RWA under the SA. The reduced floor factor will remain in place until the adoption of the Basel III reforms.
---	---

In relation to the relief programs launched by both the Canadian and U.S. federal governments and described in the Impact of COVID-19 pandemic section of this 2021 Annual Report, OSFI has provided guidance on the associated capital treatment of these programs:

•	Loans issued under the CEBA program are to be excluded from risk-based capital and leverage ratios as they are fully guaranteed by the government.
•	Risk-weighting for both the guaranteed and unsecured portion of loans issued as part of the EDC BCAP Guarantee program, as well as for the BDC Highly Affected Sectors Credit Availability Program (HASCAP), should be in accordance with existing regulatory guidelines. The full amount of these loans are required to be included in the leverage ratio calculation.
---	---
•	Risk-based capital and leverage ratio calculations should reflect only the financial institutions’ own proportion of new loans issued under the BDC lending programs.
---	---
•	Exclusion of exposures acquired through the Paycheck Protection Program (PPP) instituted by the U.S. government from RWA and leverage exposure amounts.
---	---

OSFI has assessed and will continue to assess the need for these relief measures. We have incorporated the above adjustments and guidance, as applicable, into our results and in our ongoing capital planning activities.

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The following table provides a summary of OSFI’s current regulatory target ratios under Basel III and Pillar 2 requirements. We are in compliance with all current capital and leverage requirements imposed by OSFI:

Basel III – OSFI regulatory targets	Table 64
Basel III<br>capital and<br>leverage ratios	OSFI regulatory target requirements<br>for large banks under Basel III										RBC capital <br>and <br>leverage <br>ratios as at <br>October 31, <br>2021		Domestic <br>Stability <br>Buffer<br><br>(3)		Minimum<br>including<br>Capital<br>Buffers,<br><br>D-SIB/G-SIB<br><br>surcharge and<br>Domestic<br>Stability<br>Buffer as at <br>October 31, <br>2021
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
	Minimum		Capital<br>Buffers<br><br>(1)		Minimum<br> <br>including<br> <br>Capital<br> <br>Buffers		D-SIB/G-SIB<br> <br>surcharge<br><br>(2)		Minimum<br>including<br>Capital<br>Buffers and<br><br>D-SIB/G-SIB<br><br> surcharge<br><br>(2)
Common Equity Tier 1		4.5%		2.5%		7.0%		1.0%		8.0%		13.7%		2.5%		10.5%
Tier 1 capital		6.0%		2.5%		8.5%		1.0%		9.5%		14.9%		2.5%		12.0%
Total capital		8.0%		2.5%		10.5%		1.0%		11.5%		16.7%		2.5%		14.0%
Leverage ratio		3.0%		n.a.		3.0%		n.a.		3.0%		4.9%		n.a.		3.0%
(1)	The capital buffers include the capital conservation buffer and the countercyclical capital buffer as prescribed by OSFI.
---	---
(2)	A capital surcharge, equal to the higher of our D-SIB surcharge and the BCBS’s G-SIB surcharge, is applicable to risk-weighted capital.
---	---
(3)	The DSB was increased from 1.0% to 2.5% of total RWA effective October 31, 2021.
---	---
n.a.	not applicable
---	---

Regulatory capital, RWA and capital ratios

Under Basel III, regulatory capital consists of CET1, Additional Tier 1 and Tier 2 capital.

CET1 capital comprises the highest quality of capital. Regulatory adjustments under Basel III include full deductions of certain items and additional capital components that are subject to threshold deductions.

Tier 1 capital comprises predominantly CET1 and Additional Tier 1 items including non-cumulative preferred shares and limited recourse capital notes (LRCNs) that meet certain criteria. Tier 2 capital primarily includes subordinated debentures that meet certain criteria and certain loan loss allowances. Total capital is defined as the sum of Tier 1 and Tier 2 capital. Preferred shares, LRCNs, and subordinated debentures issued after January 1, 2013 require Non-viability contingent capital (NVCC) features to be included into regulatory capital. NVCC requirements ensure that non-common regulatory capital instruments bear losses before banks seek government funding.

Regulatory capital ratios are calculated by dividing CET1, Tier 1 and Total capital by total RWA.

The following chart provides a summary of the major components of CET1, Additional Tier 1 and Tier 2 capital.

(1)	In accordance with OSFI’s regulatory adjustments announced in Q2 2020, and as discussed above, includes capital modifications associated with Stage 1 and 2 allowances which were subject to a 50% after-tax exclusion rate in fiscal 2021 that will be reduced to 25% in fiscal 2022.
(2)	First level: The amount by which each of the items exceeds a 10% threshold of CET1 capital (after all deductions but before threshold deductions) will be deducted from CET1 capital. Second level: The aggregate amount of the three items not deducted from the first level above and in excess of 15% of CET1 capital after regulatory adjustments will be deducted from capital, and the remaining balance not deducted will be risk-weighted at 250%.
---	---
(3)	Non-significant investments are subject to certain CAR criteria that drive the amount eligible for deduction.
---	---

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The following tables provide details on our regulatory capital, RWA, and capital and leverage ratios. Our capital position remains strong and our capital and leverage ratios remain well above OSFI regulatory targets:

Regulatory capital, risk-weighted assets (RWA) and capital and leverage ratios	Table 65
	As at
---	---	---	---	---
(Millions of Canadian dollars, except percentage amounts and as otherwise noted)	October 31<br> <br>2021		October 31<br> <br>2020
Capital<br><br>(1)
CET1 capital	$	75,583	$	68,082
Tier 1 capital		82,246		74,005
Total capital		92,026		84,928
Risk-weighted assets (RWA) used in calculation of capital ratios<br><br>(1)
Credit risk	$	444,142	$	448,821
Market risk		34,806		27,374
Operational risk		73,593		70,047
Total RWA	$	552,541	$	546,242
Capital ratios and Leverage ratio<br><br>(1)
CET1 ratio		13.7%		12.5%
Tier 1 capital ratio		14.9%		13.5%
Total capital ratio		16.7%		15.5%
Leverage ratio		4.9%		4.8%
Leverage ratio exposure (billions)	$	1,662	$	1,553
(1)	Capital, RWA, and capital ratios are calculated using OSFI’s CAR guideline and the Leverage ratio is calculated using OSFI’s Leverage Requirements (LR) guideline as updated in accordance with the regulatory guidance issued by OSFI in response to the COVID-19 pandemic. Both the CAR guideline and LR guideline are based on the Basel III framework.
---	---
Regulatory capital	Table 66
---	---
	As at
---	---	---	---	---	---	---
(Millions of Canadian dollars)	October 31<br> <br>2021			October 31<br> <br>2020
CET1 capital: instruments and reserves and regulatory adjustments
Directly issued qualifying common share capital (and equivalent for <br>non-joint<br> stock companies) plus related stock surplus	$	17,887		$	17,732
Retained earnings		71,563			59,573
Accumulated other comprehensive income (and other reserves)		2,533			3,414
Directly issued capital subject to phase out from CET1 (only applicable to <br>non-joint<br> stock companies)		–			–
Common share capital issued by subsidiaries and held by third parties (amount allowed in group CET1)		11			12
Regulatory adjustments applied to CET1 under Basel III		(16,411	)		(12,649	)
Common Equity Tier 1 capital (CET1)	$	75,583		$	68,082
Additional Tier 1 capital: instruments and regulatory adjustments
Directly issued qualifying Additional Tier 1 instruments plus related<br>stock surplus	$	6,661		$	5,921
Directly issued capital instruments to phase out from Additional Tier 1		–			–
Additional Tier 1 instruments issued by subsidiaries and held by third parties (amount allowed in group AT1)		2			2
Regulatory adjustments applied to Additional Tier 1 under Basel III		–			–
Additional Tier 1 capital (AT1)	$	6,663		$	5,923
Tier 1 capital (T1 = CET1 + AT1)	$	82,246		$	74,005
Tier 2 capital: instruments and provisions and regulatory adjustments
Directly issued qualifying Tier 2 instruments plus related stock surplus	$	8,443		$	9,049
Directly issued capital instruments subject to phase out from Tier 2		448			488
Tier 2 instruments issued by subsidiaries and held by third parties (amount allowed in group Tier 2)		26			29
Collective allowance		863			1,357
Regulatory adjustments applied to Tier 2 under Basel III		–			–
Tier 2 capital (T2)	$	9,780		$	10,923
Total capital (T1 + T2)	$	92,026		$	84,928

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2021 vs. 2020

(1)	Represents rounded figures.
(2)	Internal capital generation of $9.6 billion which represents Net income available to shareholders, less common and preferred share dividends and distributions on other equity instruments.
---	---

Our CET1 ratio was 13.7%, up 120 bps from last year, mainly reflecting internal capital generation, partially offset by higher RWA and the impact of lower capital modification related to eligible Stage 1 and Stage 2 allowances.

Our Tier 1 capital ratio of 14.9% was up 140 bps, reflecting the factors noted above under the CET1 ratio. Our Tier 1 ratio was also positively impacted by the issuance of LRCNs, partially offset by the redemption of preferred shares.

Our Total capital ratio of 16.7% was up 120 bps, reflecting the factors noted above under the Tier 1 capital ratio.

Our Leverage ratio of 4.9% was up 10 bps, mainly reflecting internal capital generation and the issuance of LRCNs, partially offset by growth in leverage exposures, the redemption of preferred shares and the impact of lower capital modification as noted above under the CET1 ratio.

Leverage exposures increased by $109 billion mainly driven by business growth in loans, interest-bearing deposits with banks, securities, undrawn commitments, repo-style transactions and derivatives, partially offset by the impact of foreign exchange translation and higher regulatory modifications for central bank reserves and sovereign-issued securities qualifying as HQLA.

Basel III RWA

OSFI requires banks to meet minimum risk-based capital requirements for exposures to credit risk, operational risk, and where they have significant trading activity, market risk. RWA is calculated for each of these risk types and added together to determine total RWA. In addition, a minimum capital floor requirement must be maintained as prescribed under OSFI’s CAR guidelines which is currently set to 70% of RWA as calculated under current Basel III standardized credit risk and market risk approaches as defined in the CAR guidelines. If the capital requirement is less than the required threshold, a floor adjustment to RWA must be applied to the reported RWA as prescribed by OSFI CAR guidelines.

104 Royal Bank of Canada: Annual Report 2021 Management’s Discussion and Analysis

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Total risk-weighted assets	Table 67
	2021																	2020
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
			Average<br> <br>of risk-<br>weights<br>(2)			Risk-weighted assets
As at October 31 (Millions of Canadian dollars,<br> <br>except percentage amounts)	Exposure<br>(1)				Standardized<br> <br>approach			Advanced<br> <br>approach			Other			Total			Total
Credit risk
Lending-related and other
Residential mortgages	$	328,787		8%		$	9,975		$	16,768		$	–		$	26,743		$	24,604
Other retail		356,586		20%			6,548			65,089			–			71,637			60,544
Business		400,607		50%			58,233			142,320			–			200,553			218,803
Sovereign		325,994		4%			3,640			10,772			–			14,412			15,371
Bank		26,231		18%			1,728			3,028			–			4,756			5,228
Total lending-related and other	$	1,438,205		22%		$	80,124		$	237,977		$	–		$	318,101		$	324,550
Trading-related
Repo-style transactions	$	962,491		1%		$	54		$	9,415		$	68		$	9,537		$	9,496
Derivatives		104,524		41%			2,049			21,882			18,446			42,377			42,917
Total trading-related	$	1,067,015		5%		$	2,103		$	31,297		$	18,514		$	51,914		$	52,413
Total lending-related and other and trading-related	$	2,505,220		15%		$	82,227		$	269,274		$	18,514		$	370,015		$	376,963
Bank book equities		3,951		139%			-			5,474			–			5,474			4,931
Securitization exposures		63,617		16%			5,069			5,259			–			10,328			11,489
Regulatory scaling factor		n.a.		n.a.			n.a.			16,485			–			16,485			17,385
Other assets		29,753		141%			n.a.			n.a.			41,840			41,840			38,053
Total credit risk	$	2,602,541		17%		$	87,296		$	296,492		$	60,354		$	444,142		$	448,821
Market risk
Interest rate						$	2,760			11,620			–			14,380		$	7,841
Equity							1,822			2,356			–			4,178			3,628
Foreign exchange							2,524			559			–			3,083			2,917
Commodities							692			70			–			762			287
Specific risk							5,532			2,069			–			7,601			5,985
Incremental risk charge							–			4,802			–			4,802			6,716
Total market risk						$	13,330		$	21,476		$	–		$	34,806		$	27,374
Operational risk						$	73,593			–			n.a.		$	73,593		$	70,047
Total risk-weighted assets	$	2,602,541				$	174,219		$	317,968		$	60,354		$	552,541		$	546,242
(1)	Total exposure represents EAD which is the expected gross exposure upon the default of an obligor. This amount is before any allowance against impaired loans or partial write-offs and does not reflect the impact of credit risk mitigation and collateral held.
---	---
(2)	Represents the average of counterparty risk weights within a particular category.
---	---
n.a.	not applicable
---	---

2021 vs. 2020

During the year, RWA was up $6 billion, mainly reflecting business growth in wholesale lending, including loan underwriting commitments, client-driven trading activity, residential mortgages and personal lending. These factors were partially offset by the net impact of models and methodology updates, the impact of foreign exchange translation and net credit migration in wholesale and retail portfolios. The models and methodology updates mainly include recalibration of the probability of default parameters in our wholesale portfolio, partially offset by an increase in SVaR multipliers reflecting the unwinding of temporary measures introduced by OSFI in response to the COVID-19 pandemic and transitional methodology changes to the securitization framework. The impact of foreign exchange translation on RWA is largely mitigated with economic hedges in our CET1 ratio.

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Selected capital management activity

Selected capital management activity	Table 68
	For the year ended October 31, 2021
---	---	---	---	---	---	---	---	---
(Millions of Canadian dollars, except number of shares)	Issuance or<br>redemption date		Number of<br>shares<br>(000s)			Amount
Tier 1 capital
Common shares activity
Issued in connection with share-based compensation plans <br>(1)				1,326		$	100
Issuance of LRCN Series 2 <br>(2)<br>, <br>(3)<br>, <br>(4)		November 2, 2020		1,250			1,250
Redemption of preferred shares, Series BK <br>(3), (4)		May 24, 2021		(29,000	)		(725	)
Issuance of LRCN Series 3 <br>(2)<br>, <br>(3)<br>, <br>(4)		June 8, 2021		1,000			1,000
Redemption of preferred shares, Series BM <br>(3), (4)		August 24, 2021		(30,000	)		(750	)
Tier 2 capital
Redemption of January 20, 2026 subordinated debentures <br>(4)<br>, <br>(5)		January 20, 2021				$	(1,500	)
Issuance of January 28, 2033 subordinated debentures <br>(4)<br>, <br>(5)		January 28, 2021					1,000
Redemption of September 29, 2026 subordinated debentures <br>(4), (5)		September 29, 2021					(1,000	)
Issuance of November 3, 2031 subordinated debentures <br>(4), (5)		October 14, 2021					1,750
(1)	Amounts include cash received for stock options exercised during the period and fair value adjustments to stock options.
---	---
(2)	For the LRCNs, the number of shares represent the number of notes issued.
---	---
(3)	For further details, refer to Note 19 of our 2021 Annual Consolidated Financial Statements.
---	---
(4)	NVCC instruments.
---	---
(5)	For further details, refer to Note 18 of our 2021 Annual Consolidated Financial Statements.
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On February 27, 2020, we announced a normal course issuer bid (NCIB) to purchase up to 20 million of our common shares. This NCIB expired on March 1, 2021, with 0.4 million common shares repurchased and cancelled at a cost of $39 million. In accordance with OSFI’s announcement on March 13, 2020 of its expectation that share buybacks be stopped, we ceased the repurchase of our common shares effective March 13, 2020.

As at October 31, 2021, we did not have an active NCIB. When we do have an active NCIB, we determine the amount and timing of purchases under an NCIB, subject to prior consultation with OSFI. Purchases may be made through the TSX, the NYSE and other designated exchanges and alternative Canadian trading systems. The price paid for repurchased shares is the prevailing market price at the time of acquisition.

On November 2, 2020, we issued $1,250 million of LRCN Series 2, at a price per note of $1,000. The LRCN Series 2 bear interest at a fixed rate of 4.0% per annum until February 24, 2026, and thereafter at a rate per annum, reset every fifth year, equal to the 5-Year Government of Canada Yield plus 3.617% until maturity on February 24, 2081.

On January 20, 2021, we redeemed all $1,500 million of our outstanding NVCC 3.31% subordinated debentures due on January 20, 2026 for 100% of their principal amount plus interest accrued to, but excluding, the redemption date.

On January 28, 2021, we issued $1,000 million of NVCC subordinated debentures. The notes bear interest at a fixed rate of 1.67% per annum until January 28, 2028, and at the three-month Canadian Dollar Offered Rate plus 0.55% thereafter until their maturity on January 28, 2033.

On May 24, 2021, we redeemed all 29 million of our issued and outstanding Non-Cumulative 5-Year Rate Reset First Preferred Shares Series BK at a price of $25 per share.

On June 8, 2021, we issued $1,000 million of LRCN Series 3, at a price per note of $1,000. The LRCN Series 3 bear interest at a fixed rate of 3.65% per annum until November 24, 2026, and thereafter at a rate per annum, reset every fifth year, equal to the 5-Year Government of Canada Yield plus 2.665% until maturity on November 24, 2081.

On August 24, 2021, we redeemed all 30 million of our issued and outstanding Non-Cumulative 5-Year Rate Reset First Preferred Shares Series BM at a price of $25 per share.

On September 29, 2021, we redeemed all $1,000 million of our outstanding NVCC 3.45% subordinated debentures due on September 29, 2026 for 100% of their principal amount plus interest accrued to, but excluding, the redemption date.

On October 14, 2021, we issued $1,750 million of NVCC subordinated debentures. The notes bear interest at a fixed rate of 2.14% per annum until November 3, 2026, and at the three-month Canadian Dollar Offered Rate plus 0.61% thereafter until their maturity on November 3, 2031.

On November 5, 2021, we issued 750 thousand of Non-Cumulative 5-Year Fixed Rate Reset First Preferred Shares Series BT to certain institutional investors at a price of $1,000 per share.

Dividends

Our common share dividend policy reflects our earnings outlook, payout ratio objective and the need to maintain adequate levels of capital to support business plans. In 2021, our dividend payout ratio was 39%. Common share dividends paid during the year were $6 billion. In accordance with OSFI’s announcement on March 13, 2020 of its expectation that all banks should not increase their dividend payment, we did not increase our dividend payments in fiscal 2021. OSFI lifted this restriction on November 4, 2021.

106 Royal Bank of Canada: Annual Report 2021 Management’s Discussion and Analysis

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Selected share data<br><br>(1)	Table 69
	2021								2020
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
(Millions of Canadian dollars, except number of shares<br>and as otherwise noted)	Number of<br>shares<br> (000s)			Amount			Dividends<br>declared<br>per share		Number of<br>shares (000s)			Amount			Dividends<br>declared<br>per share
Common shares issued		1,425,187		$	17,728		$	4.32		1,423,861		$	17,628		$	4.29
Treasury shares – common shares <br>(2)		(662	)		(73	)				(1,388	)		(129	)
Common shares outstanding		1,424,525		$	17,655					1,422,473		$	17,499
Stock options and awards
Outstanding		7,653								7,735
Exercisable		3,273								3,314
Available for grant		5,847								7,082
First preferred shares issued
Non-cumulative Series AZ <br>(3), (4)		20,000		$	500		$	0.93		20,000		$	500		$	0.93
Non-cumulative Series BB <br>(3), (4)		20,000			500			0.91		20,000			500			0.91
Non-cumulative Series BD <br>(3), (4)		24,000			600			0.80		24,000			600			0.85
Non-cumulative Series BF <br>(3), (4)		12,000			300			0.75		12,000			300			0.90
Non-cumulative Series BH <br>(4)		6,000			150			1.23		6,000			150			1.23
Non-cumulative Series BI <br>(4)		6,000			150			1.23		6,000			150			1.23
Non-cumulative Series BJ <br>(4)		6,000			150			1.31		6,000			150			1.31
Non-cumulative Series BK <br>(3), (4), (5)		–			–			0.69		29,000			725			1.38
Non-cumulative Series BM <br>(3), (4), (5)		–			–			1.03		30,000			750			1.38
Non-cumulative Series BO <br>(3), (4)		14,000			350			1.20		14,000			350			1.20
Non-cumulative Series C-2 <br>(6)		15			23		US$	67.50		15			23		US$	67.50
Other equity instruments issued
Limited recourse capital notes Series 1 <br>(3), (4), (7), (8)		1,750			1,750			4.50%		1,750			1,750			4.50%
Limited recourse capital notes Series 2 <br>(3), (4), (7), (8)		1,250			1,250			4.00%		–			–			–
Limited recourse capital notes Series 3 <br>(3), (4), (7), (8)		1,000			1,000			3.65%		–			–			–
Preferred shares and other equity instruments issued		112,015		$	6,723					168,765		$	5,948
Treasury instruments – preferred shares and other equity instruments <br>(2)		(164	)		(39	)				(2	)		(3	)
Preferred shares and other equity instruments outstanding		111,851		$	6,684					168,763		$	5,945
Dividends on common shares				$	6,158							$	6,111
Dividends on preferred shares and distributions on other equity instruments <br>(9)					257								268
(1)	For further details about our capital management activity, refer to Note 19 of our 2021 Annual Consolidated Financial Statements.
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(2)	Positive amounts represent a short position and negative amounts represent a long position.
---	---
(3)	Dividend rate will reset every five years.
---	---
(4)	NVCC instruments.
---	---
(5)	On May 24, 2021, we redeemed all 29 million of our issued and outstanding Non-Cumulative 5-Year Rate Reset First Preferred Shares Series BK at a price of $25 per share. On August 24, 2021, we redeemed all 30 million of our issued and outstanding Non-Cumulative 5-Year Rate Reset First Preferred Shares Series BM at a price of $25 per share.
---	---
(6)	Represents 615,400 depositary shares relating to preferred shares Series C-2. Each depositary share represents one-fortieth interest in a share of Series C-2.
---	---
(7)	For LRCNs, the number of shares represent the number of notes issued and the dividends declared per share represent the annual interest rate percentage applicable to the notes issued as at the reporting date.
---	---
(8)	In connection with the issuance of LRCN Series 1, on July 28, 2020, we issued $1,750 million of First Preferred Shares Series BQ (Series BQ); in connection with the issuance of LRCN Series 2, on November 2, 2020, we issued $1,250 million of First Preferred Shares Series BR (Series BR); and in connection with the issuance of LRCN Series 3, on June 8, 2021, we issued $1,000 million of First Preferred Shares Series BS (Series BS). The Series BQ, BR and BS preferred shares were issued at a price of $1,000 per share and were issued to a consolidated trust to be held as trust assets in connection with the LRCN structure. For further details, refer to Note 19 of our 2021 Annual Consolidated Financial Statements.
---	---
(9)	Excludes distributions to non-controlling interests.
---	---

As at November 26, 2021, the number of outstanding common shares was 1,424,669,359, net of treasury shares held of 609,742, and the number of stock options and awards was 7,549,006.

NVCC provisions require the conversion of the capital instrument into a variable number of common shares in the event that OSFI deems a bank to be non-viable or a federal or provincial government in Canada publicly announces that a bank has accepted or agreed to accept a capital injection. If a NVCC trigger event were to occur, our NVCC capital instruments as at October 31, 2021, which were the preferred shares Series AZ, BB, BD, BF, BH, BI, BJ, BO, LRCN Series 1, LRCN Series 2, LRCN Series 3 and subordinated debentures due on January 27, 2026, July 25, 2029, December 23, 2029, June 30, 2030, January 28, 2033, and November 3, 2031 would be converted into common shares pursuant to an automatic conversion formula with a conversion price based on the greater of: (i) a contractual floor price of $5.00, and (ii) the current market price of our common shares at the time of the trigger event (10-day weighted average). Based on a floor price of $5.00 and including an estimate for accrued dividends and interest, these NVCC capital instruments would convert into a maximum of 4,057 million common shares, in aggregate, which would represent a dilution impact of 74.01% based on the number of common shares outstanding as at October 31, 2021.

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Attributed capital

Our methodology for allocating capital to our business segments is based on the Basel III regulatory capital requirements, with the exception of Insurance. For Insurance, the allocation of capital is based on fully diversified economic capital. Risk-based capital attribution provides a uniform base for performance measurement among business segments, which compares to our overall corporate return objective and facilitates management decisions in resource allocation in conjunction with other factors.

The calculation and attribution of capital involves a number of assumptions and judgments by management which are monitored to ensure that the regulatory capital framework remains comprehensive and consistent. The models are benchmarked to leading industry practices via participation in surveys, reviews of methodologies and ongoing interaction with external risk management industry professionals.

For additional information on the risks highlighted below, refer to the Risk management section.

(1)	RWA amount represents period-end spot balances. Attributed Capital represents average balances.
(2)	Other includes (a) non-Insurance segments: equity required to underpin Basel III regulatory capital deductions other than Goodwill and other intangibles as well as capital modifications for expected loss provisioning and (b) Insurance segment: equity required to underpin risks associated with business, fixed assets and insurance risks.
---	---
(3)	Insurance RWA represents our investments in the insurance subsidiaries capitalized at the regulatory prescribed rate as required under OSFI CAR guideline.
---	---

Other considerations affecting capital

Capital treatment for equity investments in other entities is determined by a combination of accounting and regulatory guidelines based on the size or nature of the investment. Three broad approaches apply as follows:

•	Consolidation: entities which we control are consolidated on our Consolidated Balance Sheets.
•	Deduction: certain holdings are deducted from our regulatory capital. These include all unconsolidated “substantial investments,” as defined by the <br>Bank Act<br> (Canada) in the capital of financial institutions, as well as all investments in insurance subsidiaries.
---	---
•	Risk-weighting: equity investments that are not deducted from capital are risk-weighted at a prescribed rate for determination of capital charges.
---	---

Regulatory capital approach for securitization exposures

Our securitization regulatory capital approach reflects Chapter 7 of OSFI’s CAR guidelines. For our securitization exposures, we use an internal assessment approach (IAA) for exposures related to our ABCP business, and as per regulatory guidelines for other securitization exposures we use a combination of approaches including an external ratings based approach, an IRB approach and a standardized approach.

While our IAA rating methodologies are based in large part on criteria that are published by External Credit Assessment Institutions (ECAIs) such as S&P and therefore are similar to the methodologies used by these institutions, they are not identical. Our ratings process includes a comparison of the available credit enhancement in a securitization structure to a stressed level of projected losses. The stress level used is determined by the desired risk profile of the transaction. As a result, we stress the cash flows of a given transaction at a higher level in order to achieve a higher rating. Conversely, transactions that only pass lower stress levels achieve lower ratings.

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Most of the other securitization exposures (non-ABCP) carry external ratings and we use the external rating for determining the proper capital allocation for these positions. We periodically compare our own ratings to ECAIs ratings to ensure that the ratings provided by ECAIs are reasonable.

GRM is responsible for providing risk assessments for capital purposes in respect of all our banking book exposures. GRM is independent of the business originating the securitization exposures and performs its own analysis, sometimes in conjunction with but always independent of the applicable business. GRM has developed asset class specific criteria guidelines which provide the rating methodologies for each asset class. The guidelines are reviewed periodically and are subject to the ratings replication process mandated by Pillar I of the Basel rules.

Regulatory developments

Basel III reforms

On March 11, 2021, OSFI launched industry consultations on the adoption of the BCBS Basel III reforms into its existing Capital Adequacy Requirements, Leverage Requirements and Liquidity Adequacy Requirements Guidelines and related Pillar 3 disclosure requirements. While adopting the international standards, OSFI is also tailoring requirements for the Canadian market. On November 29, 2021, OSFI announced a one quarter implementation delay of its adoption timeline for these reforms to April 30, 2023.

On June 18, 2021, OSFI launched an industry consultation on proposed regulatory changes to the treatment of credit valuation adjustments (CVA) and market risk hedges of other valuation adjustments of over-the-counter derivatives referred to as XVA. The proposed changes are a continuation of OSFI’s aforementioned industry consultation announced in March 2021 to incorporate the latest and final round of Basel III reforms into its capital, leverage and related disclosure guidelines for banks. These revised guidelines will be effective in Q1 2024.

On November 11, 2021, BCBS finalized the disclosure requirements for the Minimum capital requirements for market risk standards published in January 2019. OSFI has not yet released their disclosure requirements; however, OSFI requires implementation of the Minimum capital requirements for market risk standards in Q1 2024.

We expect to continue to engage with OSFI on the domestic implementation of the Basel III reforms and are taking appropriate steps to ensure required adoption readiness based on guidance provided to date.

Global systemically important banks (G-SIBs)

On August 13, 2021, OSFI released revised G-SIB disclosure requirements which take into consideration the 2022 revised G-SIB assessment methodology incorporating a new trading volume indicator and inclusion of insurance activities for certain indicators. The new disclosure requirements are effective for us in Q1 2022 and we are well-positioned to comply with the new requirements. In addition, we are currently assessing the impact of the revised G-SIB framework and we do not anticipate any material impact to our current G-SIB surcharge loss absorbency requirement of 1%.

On November 9, 2021, the BCBS finalized a technical amendment to the G-SIB methodology to replace the existing three-year review cycle requirement with one of ongoing monitoring and review. BCBS will consider updating the G-SIB methodology only if monitoring findings suggest material unintended consequences or deficiencies.

Accounting and control matters
Critical accounting policies and estimates
---

Application of critical accounting policies, judgments, estimates and assumptions

Our significant accounting policies are described in Note 2 of our 2021 Annual Consolidated Financial Statements. Certain of these policies and related estimates are recognized as critical because they require us to make particularly subjective or complex judgments about matters that are inherently uncertain and significantly different amounts could be reported under different conditions or using different assumptions. The COVID-19 pandemic has continued to evolve and the economic environment in which we operate could continue to be subject to sustained uncertainty, which could continue to impact our financial results. While the global economic recovery has continued, momentum has waned amid ongoing uncertainty regarding the extent and duration of the impacts of the COVID-19 pandemic. We continue to monitor and assess the impacts of the COVID-19 pandemic on our critical accounting judgments, estimates and assumptions. For further information, refer to our 2021 Annual Consolidated Financial Statements.

Our critical accounting judgments, estimates and assumptions relate to the fair value of financial instruments, allowance for credit losses, goodwill and other intangible assets, employee benefits, consolidation, derecognition of financial assets, application of the effective interest method, provisions, insurance claims and policy benefit liabilities, and income taxes. Our critical accounting policies and estimates have been reviewed and approved by our Audit Committee, in consultation with management, as part of their review and approval of our significant accounting policies, judgments, estimates and assumptions.

Changes in accounting policies

During the first quarter of 2021, we adopted the revised Conceptual Framework, which replaces the previous version of the Conceptual Framework issued in 2010. The Conceptual Framework is not a standard, and does not override the concepts or requirements in any standard. It may be used to develop consistent accounting policies where there is no applicable standard in place. The revisions include a few new concepts, updated definitions and recognition criteria for assets and liabilities and clarifies some important concepts. These amendments had no material impact on our 2021 Annual Consolidated Financial Statements.

During the first quarter of 2021, we early adopted the Phase 2 amendments to IFRS 9 Financial Instruments , IAS 39 Financial

Instruments: Recognition and Measurement , IFRS 7 Financial Instruments: Disclosures , IFRS 4 Insurance contracts , and IFRS 16 Leases (the Amendments) in response to the market transition away from interbank offered rates (IBORs) to alternative benchmark rates (ABRs) as part of the IBOR reform (the Reform). Refer to Note 2 of our 2021 Annual Consolidated Financial Statements for details of these changes.

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Fair value of financial instruments

The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We determine fair value by incorporating factors that market participants would consider in setting a price, including commonly accepted valuation approaches.

We give priority to third-party pricing services and valuation techniques with the highest and most consistent accuracy. The level of accuracy is determined over time by comparing third-party price values to traders’ or system values, other pricing service values and, when available, actual trade data. Other valuation techniques are used when a price or quote is not available. Some valuation processes use models to determine fair value. We have a systematic and consistent approach to control the use of models.

In determining fair value, a hierarchy is used which prioritizes the inputs to valuation techniques. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets and the lowest priority to unobservable inputs. Fair values established based on this hierarchy require the use of observable market data whenever available. Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and model inputs that are either observable, or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 inputs include one or more inputs that are unobservable and significant to the fair value of the asset or liability. Unobservable inputs are used to measure fair value to the extent that observable inputs are not available at the measurement date. The availability of inputs for valuation may affect the selection of valuation techniques. The classification of a financial instrument in the fair value hierarchy for disclosure purposes is based upon the lowest level of input that is significant to the measurement of fair value.

Where observable prices or inputs are not available, management judgment is required to determine fair values by assessing other relevant sources of information such as historical data, proxy information from similar transactions, and through extrapolation and interpolation techniques. For more complex or illiquid instruments, significant judgment is required to determine the model used, select the model inputs, and in some cases, apply valuation adjustments to the model value or quoted price for inactively traded financial instruments. The selection of model inputs may be subjective and the inputs may be unobservable. Unobservable inputs are inherently uncertain as there is little or no market data available from which to determine the level at which the transaction would occur under normal business circumstances. Appropriate parameter uncertainty and market risk valuation adjustments for such inputs and other model risk valuation adjustments are assessed in all such instances.

Valuation adjustments may be subjective as they require significant judgment in the input selection, such as the probability of default and recovery rate, and are intended to arrive at a fair value that is determined based on assumptions that market participants would use in pricing the financial instrument. The realized price for a transaction may be different from its recorded value that was previously estimated using management judgment, and may therefore impact unrealized gains and losses recognized in Non-interest income – Trading revenue or Other.

For further information on the fair value of financial instruments, refer to Notes 2 and 3 of our 2021 Annual Consolidated Financial Statements.

Allowance for credit losses

An allowance for credit losses (ACL) is established for all financial assets, except for financial assets classified or designated as FVTPL and equity securities designated as FVOCI, which are not subject to impairment assessment. Assets subject to impairment assessment include certain loans, debt securities, interest-bearing deposits with banks, customers’ liability under acceptances, accounts and accrued interest receivable, and finance and operating lease receivables. Off-balance sheet items subject to impairment assessment include financial guarantees and undrawn loan commitments.

We measure the ACL on each balance sheet date according to a three-stage expected credit loss impairment model:

•	Performing financial assets
•	Stage 1 – From initial recognition of a financial asset to the date on which the asset has experienced a significant increase in credit risk relative to its initial recognition, a loss allowance is recognized equal to the credit losses expected to result from defaults occurring over the 12 months following the reporting date.
---	---
•	Stage 2 – Following a significant increase in credit risk relative to the initial recognition of the financial asset, a loss allowance is recognized equal to the credit losses expected over the remaining lifetime of the asset.
---	---
•	Impaired financial assets
---	---
•	Stage 3 – When a financial asset is considered to be credit-impaired, a loss allowance is recognized equal to credit losses expected over the remaining lifetime of the asset. Interest income is calculated based on the carrying amount of the asset, net of the loss allowance, rather than on its gross carrying amount.
---	---

The ACL is a discounted probability-weighted estimate of the cash shortfalls expected to result from defaults over the relevant time horizon. For loan commitments, credit loss estimates consider the portion of the commitment that is expected to be drawn over the relevant time period. For financial guarantees, credit loss estimates are based on the expected payments required under the guarantee contract. For finance lease receivables, credit loss estimates are based on cash flows consistent with the cash flows used in measuring the lease receivable.

The ACL represents an unbiased estimate of expected credit losses on our financial assets as at the balance sheet date. Judgment is required in making assumptions and estimations when calculating the ACL, including movements between the three stages, the inclusion of forward looking information and the application of expert credit judgment. The underlying assumptions and estimates may result in changes to the provisions from period to period that significantly affect our results of operations.

For further information on allowance for credit losses, refer to Notes 2, 4 and 5 of our 2021 Annual Consolidated Financial Statements.

Goodwill and other intangible assets

We allocate goodwill to groups of cash-generating units (CGU). Goodwill is not amortized and is tested for impairment on an annual basis, or more frequently if there are objective indications of impairment. We test for impairment by comparing the recoverable amount of a CGU with its carrying amount.

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We estimate the value in use and fair value less costs of disposal of our CGUs primarily using a discounted cash flow method which incorporates each CGU’s internal forecasts of revenues and expenses. Significant management judgment is applied in the determination of expected future cash flows (uncertainty in timing and amount), discount rates (based on CGU-specific risks) and terminal growth rates. CGU-specific risks include country risk, business/operational risk, geographic risk (including political risk, devaluation risk and government regulation), currency risk and price risk (including product pricing risk and inflation). If the future cash flows and other assumptions in future periods deviate significantly from the current amounts used in our impairment testing, the value of our goodwill could become impaired.

We assess for indicators of impairment of our other intangible assets at each reporting period. If there is an indication that an asset may be impaired, an impairment test is performed by comparing the carrying amount of the intangible asset to its recoverable amount. Where it is not possible to estimate the recoverable amount of an individual asset, we estimate the recoverable amount of the CGU to which the asset belongs. Significant judgment is applied in estimating the useful lives and recoverable amounts of our intangible assets and assessing whether certain events or circumstances constitute objective evidence of impairment. We do not have any intangible assets with indefinite lives.

For further details, refer to Notes 2 and 10 of our 2021 Annual Consolidated Financial Statements.

Employee benefits

We sponsor a number of benefit programs for eligible employees, including registered pension plans, supplemental pension plans, health, dental, disability and life insurance plans.

The calculation of defined benefit expenses and obligations depends on various assumptions such as discount rates, healthcare cost trend rates, projected salary increases, retirement age, and mortality and termination rates. Discount rates are determined using a yield curve based on spot rates from high quality corporate bonds. All other assumptions are determined by us and are reviewed by the actuaries. Actual experience that differs from the actuarial assumptions will affect the amounts of benefit obligations and remeasurements that we recognize. The weighted average assumptions used and the sensitivity of key assumptions are presented in Note 16 of our 2021 Annual Consolidated Financial Statements.

Consolidation of structured entities

Subsidiaries are those entities, including structured entities, over which we have control. We control an entity when we are exposed, or have rights, to variable returns from our involvement with the entity and have the ability to affect those returns through our power over the investee. We have power over an entity when we have existing rights that give us the current ability to direct the activities that most significantly affect the entity’s returns (relevant activities). Power may be determined on the basis of voting rights or, in the case of structured entities, other contractual arrangements.

We are not deemed to control an entity when we exercise power over an entity as the agent of a third party or parties. In determining whether we are acting as an agent, we consider the overall relationship between us, the investee and other parties to the arrangement with respect to the following factors: (i) the scope of our decision-making power; (ii) the rights held by other parties; (iii) the remuneration to which we are entitled; and (iv) our exposure to variability of returns.

The determination of control is based on the current facts and circumstances and is continuously assessed. In some circumstances, different factors and conditions may indicate that various parties control an entity depending on whether those factors and conditions are assessed in isolation or in totality. Significant judgment is applied in determining whether we control an entity, specifically, assessing whether we have substantive decision-making rights over the relevant activities and whether we are exercising our power as a principal or an agent.

We consolidate all subsidiaries from the date control is transferred to us, and cease consolidation when an entity is no longer controlled by us. Our consolidation conclusions affect the classification and amount of assets, liabilities, revenues and expenses reported in our Consolidated Financial Statements.

For further details, refer to Note 7 of our 2021 Annual Consolidated Financial Statements.

Derecognition of financial assets

We periodically enter into transactions in which we transfer financial assets such as loans or mortgage-backed securities to structured entities or trusts that issue securities to investors. We derecognize the assets when our contractual rights to the cash flows from the assets have expired; when we retain the rights to receive the cash flows but assume an obligation to pay those cash flows to a third party subject to certain pass-through requirements; or when we transfer our contractual rights to receive the cash flows and substantially all of the risks and rewards of the assets have been transferred. When we retain substantially all of the risks and rewards of the transferred assets, the transferred assets are not derecognized from our Consolidated Balance Sheets and are accounted for as secured financing transactions. When we neither retain nor transfer substantially all risks and rewards of ownership of the assets, we derecognize the assets if control over the assets is relinquished. If we retain control over the transferred assets, we continue to recognize the transferred assets to the extent of our continuing involvement. Management’s judgment is applied in determining whether we have transferred or retained substantially all risk and rewards of ownership of the transferred financial asset.

The majority of assets transferred under repurchase agreements, securities lending agreements, and in our Canadian residential mortgage securitization transactions do not qualify for derecognition. As a result, we continue to record the associated transferred assets on our Consolidated Balance Sheets and no gains or losses are recognized for those securitization activities. Otherwise, a gain or loss is recognized on securitization by comparing the carrying amount of the transferred asset with its fair value at the date of the transfer. For further information on derecognition of financial assets, refer to Notes 2 and 6 of our 2021 Annual Consolidated Financial Statements.

Application of the effective interest method

Interest is recognized in Interest income and Interest expense in the Consolidated Statements of Income generally for all interest bearing financial instruments using the effective interest method. The effective interest rate is the rate that discounts estimated future cash flows over the expected life of the financial asset or liability to the net carrying amount upon initial recognition. Significant judgment is applied in determining the effective interest rate due to uncertainty in the timing and amounts of future cash flows.

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Provisions

Provisions are liabilities of uncertain timing or amount and are recognized when we have a present legal or constructive obligation as a result of a past event, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. Provisions are measured as the best estimate of the consideration required to settle the present obligation at the reporting date. Significant judgment is required in determining whether a present obligation exists and in estimating the probability, timing and amount of any outflows. We record provisions related to litigation, asset retirement obligations and other items.

The forward-looking nature of these estimates requires us to use a significant amount of judgment in projecting the timing and amount of future cash flows. We record our provisions on the basis of all available information at the end of the reporting period and make adjustments on a quarterly basis to reflect current expectations. Should actual results differ from our expectations, we may incur expenses in excess of the provisions recognized.

Insurance claims and policy benefit liabilities

Insurance claims and policy benefit liabilities represent current claims and estimates for future insurance policy benefits. Liabilities for life insurance contracts are determined using the Canadian Asset Liability Method, which incorporates assumptions for mortality, morbidity, policy lapses and surrenders, investment yields, policy dividends, operating and policy maintenance expenses, and provisions for adverse deviation. Key assumptions are reviewed annually and updated in response to actual experience and market conditions. Liabilities for property and casualty insurance represent estimated provisions for reported and unreported claims. Liabilities for life and property and casualty insurance are included in Insurance claims and policy benefit liabilities. Changes in Insurance claims and policy benefit liabilities are included in the Insurance policyholder benefits, claims and acquisition expense in our Consolidated Statements of Income in the period in which the estimates change. Refer to Note 14 of our 2021 Annual Consolidated Financial Statements for further information.

Income taxes

We are subject to income tax laws in various jurisdictions where we operate, and the complex tax laws are potentially subject to different interpretations by us and the relevant taxation authority. Management’s judgment is applied in interpreting the relevant tax laws, in assessing the probability of acceptance of our tax positions by the relevant tax authorities and estimating the expected timing and amount of the provision for current and deferred income taxes. A deferred tax asset or liability is determined for each temporary difference based on the tax rates that are expected to be in effect in the period that the asset is realized or the liability is settled. Where the temporary differences will not reverse in the foreseeable future, no deferred tax amount is recognized.

On a quarterly basis, we review whether it is probable that the benefits associated with our deferred tax assets will be realized, using both positive and negative evidence. Refer to Note 21 of our 2021 Annual Consolidated Financial Statements for further information.

Future changes in accounting policy and disclosure

IFRS 17

Insurance Contracts

(IFRS 17)

In May 2017, the IASB issued IFRS 17 to establish a comprehensive global insurance standard which provides guidance on the recognition, measurement, presentation and disclosures of insurance contracts. IFRS 17 requires entities to measure insurance contract liabilities at their current fulfillment values using one of three approaches. In June 2020, the IASB issued amendments to IFRS 17, including deferral of the effective date by two years. This new standard will be effective for us on November 1, 2023 and will be applied retrospectively with restatement of comparatives unless impracticable. We are currently assessing the impact of adopting this standard and the amendments on our Consolidated Financial Statements.

Controls and procedures

Disclosure controls and procedures

Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in reports filed or submitted under Canadian and U.S. securities laws is recorded, processed, summarized and reported within the time periods specified under those laws and include controls and procedures that are designed to ensure that information is accumulated and communicated to management, including the President and Chief Executive Officer, and the Chief Financial Officer, to allow timely decisions regarding required disclosure.

As of October 31, 2021, management evaluated, under the supervision of and with the participation of the President and Chief Executive Officer and the Chief Financial Officer, the effectiveness of our disclosure controls and procedures as defined under rules adopted by the U.S. SEC. Based on that evaluation, the President and Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures were effective as of October 31, 2021.

Internal control over financial reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. However, because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements on a timely basis. See Management’s Report on Internal Control over Financial Reporting and the Report of Independent Registered Public Accounting Firm.

There were no changes in our internal control over financial reporting during the year ended October 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Related party transactions

In the ordinary course of business, we provide normal banking services and operational services, and enter into other transactions with associated and other related corporations, including our joint venture entities, on terms similar to those offered to non-related parties. We grant loans to directors, officers and other employees at rates normally accorded to preferred clients. In addition, we offer deferred share and other plans to non-employee directors, executives and certain other key employees. For further information, refer to Notes 11 and 25 of our audited 2021 Annual Consolidated Financial Statements.

Supplementary information
Selected annual information	Table 70
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(Millions of Canadian dollars, except per share amounts)	2021		2020		2019
---	---	---	---	---	---	---
Total revenue	$	49,693	$	47,181	$	46,002
Net income attributable to:
Shareholders		16,038		11,432		12,860
Non-controlling interest		12		5		11
	$	16,050	$	11,437	$	12,871
Basic earnings per share	$	11.08	$	7.84	$	8.78
Diluted earnings per share		11.06		7.82		8.75
Dividends declared per common shares		4.32		4.29		4.07
Total assets	$	1,706,323	$	1,624,548	$	1,428,935
Deposits		1,100,831		1,011,885		886,005

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Net interest income on average assets and liabilities															Table 71
	Average balances						Interest							Average rate
(Millions of Canadian dollars, except for percentage amounts) (1)	2021		2020		2019		2021		2020		2019			2021		2020		2019
Assets
Deposits with other banks
Canada	$	10,580	$	13,891	$	10,990	$	106	$	115	$	231			1.00%		0.83%		2.10%
U.S.		56,973		36,008		25,392		63		160		505			0.11		0.44		1.99
Other International		22,244		22,202		20,463		136		32		(53	)		0.61		0.14		(0.26	)
		89,797		72,101		56,845		305		307		683			0.34		0.43		1.20
Securities
Trading		128,977		131,685		130,647		3,736		4,622		4,573			2.90		3.51		3.50
Investment, net of applicable allowance		131,612		128,121		97,764		1,141		1,866		2,254			0.87		1.46		2.31
		260,589		259,806		228,411		4,877		6,488		6,827			1.87		2.50		2.99
Asset purchased under reverse repurchase agreements and securities borrowed		317,997		363,418		346,173		1,309		4,668		8,960			0.41		1.28		2.59
Loans<br> <br>(2)
Canada
Retail		441,380		404,051		379,853		13,658		14,534		15,352			3.09		3.60		4.04
Wholesale		86,978		93,238		89,503		3,557		4,179		4,988			4.09		4.48		5.57
		528,358		497,289		469,356		17,215		18,713		20,340			3.26		3.76		4.33
U.S.		110,314		111,931		96,492		2,880		3,034		3,099			2.61		2.71		3.21
Other International		40,619		37,985		32,430		1,559		1,673		1,424			3.84		4.40		4.39
		679,291		647,205		598,278		21,654		23,420		24,863			3.19		3.62		4.16
Total interest-earning assets		1,347,674		1,342,530		1,229,707		28,145		34,883		41,333			2.09		2.60		3.36
Non-interest-bearing deposits with other banks		120,154		72,698		29,430		–		–		–			–		–		–
Customers’ liability under acceptances		19,410		18,572		17,447		–		–		–			–		–		–
Other assets		190,963		202,893		159,599		–		–		–			–		–		–
Total assets	$	1,678,200	$	1,636,700	$	1,436,200	$	28,145	$	34,883	$	41,333			1.68%		2.13%		2.88%
Liabilities and shareholders’ equity
Deposits<br><br>(3)
Canada	$	626,549	$	612,675	$	555,467	$	4,700	$	7,378	$	10,420			0.75%		1.20%		1.88%
U.S.		132,833		105,892		97,563		231		658		1,524			0.17		0.62		1.56
Other International		97,355		93,597		83,349		517		747		1,044			0.53		0.80		1.25
		856,737		812,164		736,379		5,448		8,783		12,988			0.64		1.08		1.76
Obligations related to securities sold short		33,566		35,937		34,799		1,809		2,200		1,995			5.39		6.12		5.73
Obligations related to assets sold under repurchase agreements and securities loaned		275,870		308,723		262,929		574		2,622		6,147			0.21		0.85		2.34
Subordinated debentures		9,174		9,518		9,405		179		280		365			1.95		2.94		3.88
Other interest-bearing liabilities		23,486		24,957		16,496		133		163		89			0.57		0.65		0.54
Total interest-bearing liabilities		1,198,833		1,191,299		1,060,008		8,143		14,048		21,584			0.68		1.18		2.04
Non-interest-bearing deposits		202,316		158,468		133,702		–		–		–			–		–		–
Acceptances		19,516		18,646		17,473		–		–		–			–		–		–
Other liabilities		165,286		183,355		143,948		–		–		–			–		–		–
Total liabilities	$	1,585,951	$	1,551,768	$	1,355,131	$	8,143	$	14,048	$	21,584			0.51%		0.91%		1.59%
Equity	$	92,250	$	84,925	$	81,052		n.a.		n.a.		n.a.			n.a.		n.a.		n.a.
Total liabilities and shareholders’ equity	$	1,678,200	$	1,636,700	$	1,436,200	$	8,143	$	14,048	$	21,584			0.49%		0.86%		1.50%
Net interest income and margin	$	1,678,200	$	1,636,700	$	1,436,200	$	20,002	$	20,835	$	19,749			1.19%		1.27%		1.38%
Net interest income and margin (average earning assets, net)
Canada	$	793,130	$	779,433	$	700,153	$	13,947	$	14,185	$	14,375			1.76%		1.82%		2.05%
U.S.		349,840		356,916		329,655		4,447		4,959		4,058			1.27		1.39		1.23
Other International		204,706		206,183		199,898		1,608		1,691		1,316			0.79		0.82		0.66
Total	$	1,347,676	$	1,342,532	$	1,229,706	$	20,002	$	20,835	$	19,749			1.48%		1.55%		1.61%
(1)	Insurance segment assets and liabilities are included in Other assets and Other liabilities, respectively.
---	---
(2)	Interest income includes loan fees of $888 million (2020 – $797 million; 2019 – $672 million).
---	---
(3)	Deposits include personal chequing and savings deposits with average balances of $258 billion (2020 – $218 billion; 2019 – $189 billion), interest expense of $175 million (2020 – $498 million; 2019 – $1,051 million) and average rates of 0.07% (2020 – 0.2%; 2019 – 0.6%). Deposits also include term deposits with average balances of $437 billion (2020 – $443 billion; 2019 – $421 billion), interest expense of $4,487 million (2020 – $6,774 million; 2019 – $9,205 million) and average rates of 1.03% (2020 – 1.53%; 2019 – 2.19%).
---	---
n.a.	not applicable
---	---

114 Royal Bank of Canada: Annual Report 2021 Management’s Discussion and Analysis

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Change in net interest income	Table 72
	2021 vs. 2020									2020 vs. 2019						Net change
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
	Increase (decrease) due<br>to changes in									Increase (decrease) due<br>to changes in
(Millions of Canadian dollars) (1)	Average<br>volume<br> (2)			Average<br>rate<br> (2)			Net change			Average<br>volume (2)			Average<br>rate (2)
Assets
Deposits with other banks
Canada <br>(3)	$	(27	)	$	18		$	(9	)	$	61		$	(177	)	$	(116	)
U.S. <br>(3)		93			(190	)		(97	)		211			(556	)		(345	)
Other international <br>(3)		–			104			104			(5	)		90			85
Securities
Trading		(95	)		(791	)		(886	)		36			13			49
Investment, net of applicable allowance		51			(776	)		(725	)		700			(1,088	)		(388	)
Asset purchased under reverse repurchase agreements and securities borrowed		(583	)		(2,776	)		(3,359	)		446			(4,738	)		(4,292	)
Loans
Canada
Retail		1,343			(2,219	)		(876	)		978			(1,796	)		(818	)
Wholesale		(281	)		(341	)		(622	)		208			(1,017	)		(809	)
U.S.		(44	)		(110	)		(154	)		496			(561	)		(65	)
Other international		116			(230	)		(114	)		244			5			249
Total interest income	$	573		$	(7,311	)	$	(6,738	)	$	3,375		$	(9,825	)	$	(6,450	)
Liabilities
Deposits
Canada		167			(2,845	)		(2,678	)		1,073			(4,115	)		(3,042	)
U.S.		167			(594	)		(427	)		130			(996	)		(866	)
Other international		30			(260	)		(230	)		128			(425	)		(297	)
Obligations related to securities sold short		(145	)		(246	)		(391	)		65			140			205
Obligations related to assets sold under repurchase agreements and securities loaned		(279	)		(1,769	)		(2,048	)		1,071			(4,596	)		(3,525	)
Subordinated debentures		(10	)		(91	)		(101	)		4			(89	)		(85	)
Other interest-bearing liabilities		(10	)		(20	)		(30	)		46			28			74
Total interest expense	$	(80	)	$	(5,825	)	$	(5,905	)	$	2,517		$	(10,053	)	$	(7,536	)
Net interest income	$	653		$	(1,486	)	$	(833	)	$	858		$	228		$	1,086
(1)	Insurance segment assets and liabilities are included in Other assets and Other liabilities, respectively.
---	---
(2)	Volume/rate variance is allocated on the percentage relationships of changes in balances and changes in rates to the total net change in net interest income.
---	---
(3)	Geographic classification for selected assets and liabilities is based on the domicile of the booking point of the subject assets and liabilities.
---	---
Loans and acceptances by geography	Table 73
---	---
As at October 31 (Millions of Canadian dollars)	2021			2020			2019			2018			2017
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
Canada<br><br>(1)
Residential mortgages	$	354,169		$	319,287		$	287,767		$	265,831		$	255,799
Personal		78,232			79,778			81,547			82,112			82,022
Credit cards		17,235			17,060			19,617			18,793			17,491
Small business <br>(2)		12,003			5,742			5,434			4,866			4,493
Retail		461,639			421,867			394,365			371,602			359,805
Wholesale <br>(2), (3)		107,750			106,283			108,215			99,530			94,326
	$	569,389		$	528,150		$	502,580		$	471,132		$	454,131
U.S.<br><br>(1)
Retail		35,601			29,721			24,850			21,033			18,100
Wholesale <br>(3)		86,041			85,947			71,607			67,894			57,773
		121,642			115,668			96,457			88,927			75,873
Other International<br><br>(1)
Retail		6,358			6,388			6,871			6,817			7,265
Wholesale <br>(3)		44,148			35,039			34,134			28,516			23,966
		50,506			41,427			41,005			35,333			31,231
Total loans and acceptances	$	741,537		$	685,245		$	640,042		$	595,392		$	561,235
Total allowance for credit losses		(4,164	)		(5,746	)		(3,124	)		(2,933	)		(2,159	)
Total loans and acceptances, net of allowance for credit losses	$	737,373		$	679,499		$	636,918		$	592,459		$	559,076
(1)	Geographic information is based on residence of borrower.
---	---
(2)	Commencing Q2 2021, certain loans are now classified as Retail – Small business and were previously classified as Wholesale, reflecting an alignment with capital measurement and reporting.
---	---
(3)	Amounts by geography have been revised from those previously presented.
---	---

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Loans and acceptances by portfolio and sector														Table 74
As at October 31 (Millions of Canadian dollars)	2021			2020			2019			2018			2017
Residential mortgages	$	380,332		$	342,597		$	308,091		$	282,471		$	270,348
Personal		93,441			92,011			92,250			92,700			92,294
Credit cards		17,822			17,626			20,311			19,415			18,035
Small business <br>(1)		12,003			5,742			5,434			4,866			4,493
Retail	$	503,598		$	457,976		$	426,086		$	399,452		$	385,170
Agriculture		9,250			9,418			8,951			8,325			7,397
Automotive		6,198			8,361			9,695			8,761			8,319
Banking		7,734			8,189			6,977			7,620			6,413
Consumer discretionary		14,806			15,093			16,448			15,453			14,428
Consumer staples		6,142			6,021			5,395			4,505			4,590
Oil and gas		5,283			7,552			8,126			6,144			5,599
Financial services		29,192			22,153			18,985			15,567			10,210
Financing products		10,273			5,827			6,368			5,569			4,475
Forest products		931			1,120			1,452			1,101			913
Governments		6,677			10,409			4,533			4,363			9,884
Industrial products		7,193			6,825			7,477			7,615			5,684
Information technology		3,569			4,591			4,562			4,635			4,086
Investments		19,392			15,232			14,352			8,991			8,871
Mining and metals		984			1,044			1,175			1,301			1,114
Public works and infrastructure		1,890			1,868			2,208			2,311			1,932
Real estate and related		66,798			61,047			54,353			48,493			43,694
Other services		20,550			21,138			21,086			18,642			16,640
Telecommunication and media		5,047			4,851			4,853			7,018			4,867
Transportation		6,251			7,662			5,539			5,593			5,391
Utilities		8,699			8,241			9,066			8,382			6,978
Other sectors		1,080			627			2,355			5,551			4,580
Wholesale<br><br>(1), (2)	$	237,939		$	227,269		$	213,956		$	195,940		$	176,065
Total loans and acceptances	$	741,537		$	685,245		$	640,042		$	595,392		$	561,235
Total allowance for credit losses		(4,164	)		(5,746	)		(3,124	)		(2,933	)		(2,159	)
Total loans and acceptances, net of allowance for credit losses	$	737,373		$	679,499		$	636,918		$	592,459		$	559,076
(1)	Commencing Q2 2021, certain loans are now classified as Retail – Small business and were previously classified as Wholesale, reflecting an alignment with capital measurement and reporting.
---	---
(2)	Certain loan amounts by sector have been revised from those previously presented to align with our view of credit risk by industry.
---	---

116 Royal Bank of Canada: Annual Report 2021 Management’s Discussion and Analysis

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Gross impaired loans by portfolio and geography	Table 75
As at October 31 (Millions of Canadian dollars, except for percentage amounts)	2021			2020			2019			2018			2017
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
Residential mortgages	$	645		$	638		$	732		$	725		$	634
Personal		197			212			306			302			276
Small business		109			90			57			44			38
Retail		951			940			1,095			1,071			948
Agriculture	$	11		$	70		$	37		$	29		$	28
Automotive		8			79			28			7			29
Banking		–			4			10			18			26
Consumer discretionary		274			281			171			138			77
Consumer staples		32			112			51			23			55
Oil and gas		131			552			509			230			318
Financial services		77			81			81			80			113
Financing products		–			–			–			–			–
Forest products		4			13			35			9			7
Governments		25			7			5			15			8
Industrial products		35			57			92			42			34
Information technology		5			14			16			2			70
Investments		31			47			7			8			25
Mining and metals		3			30			1			2			3
Public works and infrastructure		6			8			12			3			4
Real estate and related		314			395			408			290			340
Other services		220			251			134			73			158
Telecommunication and media		6			6			12			8			12
Transportation		137			148			13			58			7
Utilities		–			46			211			8			10
Other sectors		32			45			35			48			48
Wholesale		1,351			2,246			1,868			1,091			1,372
Acquired credit-impaired loans		6			9			13			21			256
Total GIL<br> <br>(1), (2)	$	2,308		$	3,195		$	2,976		$	2,183		$	2,576
Canada<br><br>(3)
Residential mortgages	$	443		$	425		$	481		$	431		$	323
Personal		164			177			250			248			198
Small business		109			90			57			44			38
Retail		716			692			788			723			559
Agriculture		11			69			36			29			22
Automotive		5			20			18			5			4
Banking		–			4			10			18			26
Consumer discretionary		107			117			71			62			54
Consumer staples		25			34			24			10			10
Oil and gas		48			90			97			38			16
Financial services		–			–			–			1			3
Financing products		–			–			–			–			–
Forest products		4			13			9			9			7
Governments		25			2			5			11			2
Industrial products		31			54			48			31			25
Information technology		3			3			4			1			2
Investments		–			–			2			–			1
Mining and metals		3			4			1			2			3
Public works and infrastructure		5			7			10			3			4
Real estate and related		157			233			195			134			182
Other services		110			85			65			24			47
Telecommunication and media		5			4			11			7			10
Transportation		16			15			13			11			7
Utilities		–			–			59			–			1
Other sectors		–			–			–			–			–
Wholesale		555			754			678			396			426
Total	$	1,271		$	1,446		$	1,466		$	1,119		$	985
U.S.<br><br>(3)
Retail	$	23		$	32		$	36		$	23		$	59
Wholesale		412			1,039			869			401			736
Total	$	435		$	1,071		$	905		$	424		$	795
Other International<br><br>(3)
Retail	$	212		$	216		$	272		$	327		$	345
Wholesale		390			462			333			313			451
Total	$	602		$	678		$	605		$	640		$	796
Total GIL<br> <br>(1), (2)	$	2,308		$	3,195		$	2,976		$	2,183		$	2,576
Allowance on impaired loans <br>(4)		(697	)		(949	)		(832	)		(700	)		(737	)
Net impaired loans	$	1,611		$	2,246		$	2,144		$	1,483		$	1,839
GIL as a % of loans and acceptances
Residential mortgages		0.17%			0.19%			0.24%			0.26%			0.23%
Personal		0.21%			0.23%			0.33%			0.33%			0.30%
Small business		0.91%			1.56%			1.05%			0.90%			0.85%
Retail		0.19%			0.21%			0.26%			0.27%			0.25%
Wholesale		0.57%			0.99%			0.88%			0.57%			0.92%
Total		0.31%			0.47%			0.46%			0.37%			0.46%
Allowance on impaired loans as a % of GIL<br> <br>(4)		30.21%			29.71%			27.96%			32.08%			28.61%
(1)	Effective November 1, 2017, the definition of gross impaired loans has been shortened for certain products to align with a definition of default of 90 days past due under IFRS 9. Past due loans greater than 90 days not included in impaired loans were $137 million in 2021 (2020 – $142 million; 2019 – $189 million; 2018 – $179 million; 2017 – $307 million). For further details, refer to Note 5 of our 2021 Annual Consolidated Financial Statements.
---	---
(2)	Effective November 1, 2017, GIL excludes $229 million of acquired credit impaired loans related to our acquisition of City National that have returned to performing status.
---	---
(3)	Geographic information is based on residence of borrower.
---	---
(4)	Effective November 1, 2017, represents Stage 3 ACL on loans, acceptances, and commitments under IFRS 9 and Allowances for impaired loans under IAS 39.
---	---

Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2021 117

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Provision for credit losses by portfolio and geography	Table 76
For the year ended October 31 (Millions of Canadian dollars, except for percentage amounts)	2021			2020			2019			2018			2017
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
Residential mortgages	$	34		$	28		$	51		$	51		$	56
Personal		243			376			487			462			409
Credit cards		296			484			518			468			435
Small business		31			49			36			30			32
Retail		604			937			1,092			1,011			932
Agriculture	$	(5	)	$	14		$	8		$	1		$	4
Automotive		(5	)		28			10			5			14
Banking		–			–			–			(1	)		3
Consumer discretionary		7			98			61			81			12
Consumer staples		(14	)		28			33			1			6
Oil and gas		(51	)		305			98			1			(28	)
Financial services		2			4			–			–			(18	)
Financing products		–			–			–			–			–
Forest products		(5	)		2			9			3			3
Governments		2			(2	)		6			4			1
Industrial products		2			31			104			8			11
Information technology		24			(7	)		30			(21	)		4
Investments		(3	)		7			–			3			–
Mining and metals		(5	)		9			–			–			(4	)
Public works and infrastructure		2			(9	)		57			2			1
Real estate and related		30			54			57			13			120
Other services		53			89			35			22			20
Telecommunication and media		9			(3	)		7			–			8
Transportation		32			8			9			32			1
Utilities		(1	)		2			70			1			5
Other sectors		(1	)		5			5			(8	)		53
Wholesale		73			663			599			147			216
Acquired credit-impaired loans		1			–			–			2			2
Total PCL on impaired loans<br> <br>(1)	$	678		$	1,600		$	1,691		$	1,160		$	1,150
Canada<br><br>(2)
Residential mortgages	$	24		$	35		$	32		$	44		$	33
Personal		254			395			488			458			413
Credit cards		288			471			505			456			426
Small business		31			49			36			30			32
Retail		597			950			1,061			988			904
Agriculture		(4	)		10			8			1			2
Automotive		(5	)		17			4			1			1
Banking		–			–			–			(1	)		3
Consumer discretionary		11			45			24			28			20
Consumer staples		–			8			14			2			3
Oil and gas		(19	)		33			34			4			(17	)
Financial services		–			1			–			–			–
Financing products		–			–			–			–			–
Forest products		(5	)		2			5			3			3
Governments		2			(3	)		4			1			1
Industrial products		2			12			27			6			8
Information technology		2			(2	)		28			1			1
Investments		–			(2	)		–			–			–
Mining and metals		–			–			–			–			1
Public works and infrastructure		2			1			45			1			1
Real estate and related		26			24			53			14			43
Other services		62			25			29			17			15
Telecommunication and media		2			(4	)		5			–			9
Transportation		10			(6	)		9			2			2
Utilities		–			1			2			–			–
Other sectors		–			1			1			–			(1	)
Wholesale		86			163			292			80			95
Total	$	683		$	1,113		$	1,353		$	1,068		$	999
U.S.<br><br>(2)
Retail	$	7		$	5		$	12		$	4		$	3
Wholesale		(10	)		377			223			64			117
Total	$	(3	)	$	382		$	235		$	68		$	120
Other International<br> <br>(2)
Retail	$	–		$	(18	)	$	19		$	19		$	25
Wholesale		(2	)		123			84			5			6
Total	$	(2	)	$	105		$	103		$	24		$	31
Total PCL on impaired loans<br> <br>(1)	$	678		$	1,600		$	1,691		$	1,160		$	1,150
Total PCL on performing loans<br> <br>(3)		(1,350	)		2,631			200			123			–
Total PCL on other financial assets		(81	)		120			(27	)		24
Total PCL	$	(753	)	$	4,351		$	1,864		$	1,307		$	1,150
PCL on loans as a % of average net loans and acceptances		(0.10)%			0.63%			0.31%			0.23%			0.21%
PCL on impaired loans as a % of average net loans and acceptances<br> <br>(1)		0.10%			0.24%			0.27%			0.20%			0.21%
(1)	Effective November 1, 2017, represents Stage 3 PCL under IFRS 9 and PCL on impaired loans under IAS 39.
---	---
(2)	Geographic information is based on residence of borrower.
---	---
(3)	Effective November 1, 2017, represents Stage 1 and 2 PCL on loans, acceptances, and commitments under IFRS 9 and PCL for loans not yet identified as impaired under IAS 39.
---	---

118 Royal Bank of Canada: Annual Report 2021 Management’s Discussion and Analysis

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Allowance on loans by portfolio and geography<br><br>(1)	Table 77
As at and for the year ended October 31 (Millions of Canadian dollars, except percentage amounts)	2021			2020			2019			2018			2017
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
Allowance on loans at beginning of year	$	6,115		$	3,419		$	3,088		$	2,976		$	2,326
PCL		(672	)		4,231			1,891			1,283			1,150
Write-offs by portfolio
Residential mortgages		(37	)		(44	)		(45	)		(51	)		(53	)
Personal		(387	)		(545	)		(600	)		(552	)		(543	)
Credit cards		(460	)		(617	)		(655	)		(599	)		(565	)
Small business		(32	)		(38	)		(36	)		(35	)		(38	)
Retail	$	(916	)	$	(1,244	)	$	(1,336	)	$	(1,237	)	$	(1,199	)
Wholesale	$	(253	)	$	(437	)	$	(440	)	$	(207	)	$	(226	)
Total write-offs by portfolio	$	(1,169	)	$	(1,681	)	$	(1,776	)	$	(1,444	)	$	(1,425	)
Recoveries by portfolio
Residential mortgages	$	10		$	10		$	8		$	8		$	8
Personal		140			134			126			121			116
Credit cards		163			133			137			131			131
Small business		9			7			8			7			9
Retail	$	322		$	284		$	279		$	267		$	264
Wholesale	$	53		$	57		$	43		$	65		$	66
Total recoveries by portfolio	$	375		$	341		$	322		$	332		$	330
Net write-offs	$	(794	)	$	(1,340	)	$	(1,454	)	$	(1,112	)	$	(1,095	)
Exchange rate and other		(230	)		(195	)		(106	)		(59	)		(131	)
Total allowance on loans at end of year	$	4,419		$	6,115		$	3,419		$	3,088		$	2,250
Allowance against impaired loans<br> <br>(2)
Canada<br><br>(3)
Residential mortgages	$	45		$	53		$	50		$	43		$	31
Personal		71			78			115			107			91
Small business		34			33			22			18			19
Retail	$	150		$	164		$	187		$	168		$	141
Agriculture	$	3		$	10		$	6		$	4		$	5
Automotive		1			12			3			4			4
Banking		–			–			–			1			2
Consumer discretionary		9			35			11			22			18
Consumer staples		5			7			2			3			2
Oil and gas		29			49			29			4			4
Financial services		–			–			–			–			1
Financing products		–			–			–			–			–
Forest products		1			9			7			3			3
Governments		3			2			5			1			1
Industrial products		9			15			11			8			9
Information technology		1			1			3			–			1
Investments		–			–			2			–			–
Mining and metals		1			1			1			–			3
Public works and infrastructure		2			2			1			1			1
Real estate and related		27			36			35			28			47
Other services		81			39			34			7			17
Telecommunication and media		1			–			11			3			4
Transportation		9			2			10			3			2
Utilities		–			–			1			–			–
Other sectors		–			–			–			–			–
Wholesale	$	182		$	220		$	172		$	92		$	124
Total	$	332		$	384		$	359		$	260		$	265
U.S.<br> <br>(3)
Retail	$	3		$	1		$	1		$	1		$	1
Wholesale		126			267			141			164			150
Total	$	129		$	268		$	142		$	165		$	151
Other International<br><br>(3)
Retail	$	107		$	116		$	156		$	166		$	168
Wholesale		129			181			175			109			153
Total	$	236		$	297		$	331		$	275		$	321
Total allowance on impaired loans<br> <br>(2)	$	697		$	949		$	832		$	700		$	737
Allowance on performing loans<br> <br>(4)
Residential mortgages	$	278		$	366		$	223		$	206		$	128
Personal		991			1,213			792			754			391
Credit cards		875			1,246			832			760			379
Small business		143			107			39			33			37
Retail	$	2,287		$	2,932		$	1,886		$	1,753		$	935
Wholesale	$	1,435		$	2,234		$	701		$	635		$	487
Off-balance sheet and other items													$	91
Total allowance on performing loans<br> <br>(4)	$	3,722		$	5,166		$	2,587		$	2,388		$	1,513
Total allowance on loans	$	4,419		$	6,115		$	3,419		$	3,088		$	2,250
Key ratios
Allowance on loans as a % of loans and acceptances		0.60%			0.89%			0.53%			0.52%			0.40%
Net write-offs as a % of average net loans and acceptances		0.11%			0.20%			0.24%			0.20%			0.20%
(1)	Includes loans, acceptances, and commitments.
---	---
(2)	Effective November 1, 2017, represents Stage 3 ACL on loans, acceptances and commitments under IFRS 9 and Allowance for impaired loans under IAS 39.
---	---
(3)	Geographic information is based on residence of borrower.
---	---
(4)	Effective November 1, 2017, represents Stage 1 and Stage 2 ACL on loans, acceptances and commitments under IFRS 9 and Allowance for loans not yet identified as impaired under IAS 39.
---	---

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Credit quality information by Canadian province<br><br>(1)	Table 78
(Millions of Canadian dollars)	2021		2020		2019		2018		2017
---	---	---	---	---	---	---	---	---	---	---
Loans and acceptances<br><br>(2)
Atlantic provinces <br>(3)	$	29,078	$	27,615	$	26,990	$	25,420	$	24,589
Quebec		68,595		64,534		62,286		58,256		56,802
Ontario		268,317		240,673		224,055		205,792		196,877
Alberta		71,506		71,161		70,873		69,719		68,122
Other Prairie provinces <br>(4)		33,956		33,758		33,303		32,415		31,649
B.C. and territories <br>(5)		97,937		90,409		85,073		79,530		76,092
Total loans and acceptances in Canada	$	569,389	$	528,150	$	502,580	$	471,132	$	454,131
Gross impaired loans<br><br>(6)
Atlantic provinces <br>(3)	$	97	$	111	$	94	$	89	$	77
Quebec		198		271		250		185		176
Ontario		379		393		290		227		213
Alberta		321		386		448		335		284
Other Prairie provinces <br>(4)		173		178		215		176		125
B.C. and territories <br>(5)		103		107		169		107		110
Total GIL in Canada	$	1,271	$	1,446	$	1,466	$	1,119	$	985
PCL on impaired loans<br><br>(7)
Atlantic provinces <br>(3)	$	22	$	43	$	73	$	59	$	66
Quebec		22		95		104		94		85
Ontario		483		710		844		678		617
Alberta		83		151		175		116		112
Other Prairie provinces <br>(4)		39		60		85		68		64
B.C. and territories <br>(5)		34		54		72		53		55
Total PCL on impaired loans in Canada	$	683	$	1,113	$	1,353	$	1,068	$	999
(1)	Geographic information is based on residence of borrower.
---	---
(2)	Certain loan amounts by Canadian province have been revised from those previously presented.
---	---
(3)	Comprises Newfoundland and Labrador, Prince Edward Island, Nova Scotia and New Brunswick.
---	---
(4)	Comprises Manitoba and Saskatchewan.
---	---
(5)	Comprises British Columbia, Nunavut, Northwest Territories and Yukon.
---	---
(6)	Effective November 1, 2017, the definition of gross impaired loans has been shortened for certain products to align with a definition of default of 90 days past due under IFRS 9.
---	---
(7)	Effective November 1, 2017, represents Stage 3 PCL under IFRS 9 and PCL on impaired loans under IAS 39.
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120 Royal Bank of Canada: Annual Report 2021 Management’s Discussion and Analysis

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Glossary

Acceptances

A bill of exchange or negotiable instrument drawn by the borrower for payment at maturity and accepted by a bank. The acceptance constitutes a guarantee of payment by the bank and can be traded in the money market. The bank earns a “stamping fee” for providing this guarantee.

Allowance for credit losses (ACL)

The amount deemed adequate by management to absorb expected credit losses as at the balance sheet date. The allowance is established for all financial assets subject to impairment assessment, including certain loans, debt securities, customers’ liability under acceptances, financial guarantees, and undrawn loan commitments. The allowance is changed by the amount of provision for credit losses recorded, which is charged to income, and decreased by the amount of write-offs net of recoveries in the period.

Asset-backed securities (ABS)

Securities created through the securitization of a pool of assets, for example auto loans or credit card loans.

Assets under administration (AUA)

Assets administered by us, which are beneficially owned by clients, as at October 31, unless otherwise noted. Services provided in respect of assets under administration are of an administrative nature, including safekeeping, collecting investment income, settling purchase and sale transactions, and record keeping.

Assets under management (AUM)

Assets managed by us, which are beneficially owned by clients, as at October 31, unless otherwise noted. Services provided in respect of assets under management include the selection of investments and the provision of investment advice. We have assets under management that are also administered by us and included in assets under administration.

Attributed capital

Attributed capital is based on the Basel III regulatory capital requirements and economic capital.

Auction rate securities (ARS)

Debt securities whose interest rates are regularly reset through an auction process.

Average earning assets, net

Average earning assets include interest-bearing deposits with other banks, securities, net of applicable allowance, assets purchased under reverse repurchase agreements and securities borrowed, loans, net of allowance, cash collateral and margin deposits. Insurance assets, and all other assets not specified are excluded. The averages are based on the daily balances for the period.

Basis point (bp)

One one-hundredth of a percentage point (.01%).

Collateral

Assets pledged as security for a loan or other obligation. Collateral can take many forms, such as cash, highly rated securities, property, inventory, equipment and receivables.

Collateralized debt obligation (CDO)

Securities with multiple tranches that are issued by structured entities and collateralized by debt obligations including bonds and loans. Each tranche offers a varying

degree of risk and return so as to meet investor demand.

Commercial mortgage-backed securities (CMBS)

Securities created through the securitization of commercial mortgages.

Commitments to extend credit

Unutilized amount of credit facilities available to clients either in the form of loans, bankers’ acceptances and other on-balance sheet financing, or through off-balance sheet products such as guarantees and letters of credit.

Common Equity Tier 1 (CET1) capital

A regulatory Basel III capital measure comprised mainly of common shareholders’ equity less regulatory deductions and adjustments for goodwill and intangibles, defined benefit pension fund assets, shortfall in allowances and other specified items.

Common Equity Tier 1 capital ratio

A risk-based capital measure calculated as CET1 capital divided by risk-weighted assets.

Covered bonds

Full recourse on-balance sheet obligations issued by banks and credit institutions that are fully collateralized by assets over which investors enjoy a priority claim in the event of an issuer’s insolvency.

Credit default swaps (CDS)

A derivative contract that provides the purchaser with a one-time payment should the referenced entity/entities default (or a similar triggering event occur).

Derivative

A contract between two parties, which requires little or no initial investment and where payments between the parties are dependent upon the movements in price of an underlying instrument, index or financial rate. Examples of derivatives include swaps, options, forward rate agreements and futures. The notional amount of the derivative is the contract amount used as a reference point to calculate the payments to be exchanged between the two parties, and the notional amount itself is generally not exchanged by the parties.

Dividend payout ratio

Common dividends as a percentage of net income available to common shareholders.

Dividend yield

Dividends per common share divided by the average of the high and low share price in the relevant period.

Earnings per share (EPS), basic

Calculated as net income available to common shareholders divided by the average number of shares outstanding.

Earnings per share (EPS), diluted

Calculated as net income available to common shareholders divided by the average number of shares outstanding adjusted for the dilutive effects of stock options and other convertible securities.

Expected credit losses

The difference between the contractual cash flows due to us in accordance with the relevant contractual terms and the cash flows that we expect to receive, discounted to the balance sheet date.

Fair value

Fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Funding Valuation Adjustment

Funding valuation adjustments are calculated to incorporate cost and benefit of funding in the valuation of uncollateralized and under-collateralized OTC derivatives. Future expected cash flows of these derivatives are discounted to reflect the cost and benefit of funding the derivatives by using a funding curve, implied volatilities and correlations as inputs.

Guarantees and standby letters of credit

These primarily represent irrevocable assurances that a bank will make payments in the event that its client cannot meet its financial obligations to third parties. Certain other guarantees, such as bid and performance bonds, represent non-financial undertakings.

Hedge

A risk management technique used to mitigate exposure from market, interest rate or foreign currency exchange risk arising from normal banking operations. The elimination or reduction of such exposure is accomplished by establishing offsetting positions. For example, assets denominated in foreign currencies can be offset with liabilities in the same currencies or through the use of foreign exchange hedging instruments such as futures, options or foreign exchange contracts.

Hedge funds

A type of investment fund, marketed to accredited high net worth investors, that is subject to limited regulation and restrictions on its investments compared to retail mutual funds, and that often utilize aggressive strategies such as selling short, leverage, program trading, swaps, arbitrage and derivatives.

High-quality liquid assets (HQLA)

Assets are considered to be HQLA if they can be easily and immediately converted into cash at little or no loss of value during a time of stress.

Impaired loans

Loans are classified as impaired when there has been a deterioration of credit quality to the extent that management no longer has reasonable assurance of timely collection of the full amount of principal and interest in accordance with the contractual terms of the loan agreement. Credit card balances are not classified as impaired as they are directly written off after payments are 180 days past due.

International Financial Reporting Standards (IFRS)

IFRS are principles-based standards, interpretations and the framework adopted by the International Accounting Standards Board.

Leverage Ratio

A Basel III regulatory measure, the ratio divides Tier 1 capital by the sum of total assets plus specified off-balance sheet items.

Liquidity Coverage Ratio (LCR)

The Liquidity Coverage Ratio is a Basel III metric that measures the sufficiency of HQLA available to meet net short-term financial obligations over a thirty day period in an acute stress scenario.

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Loan-to-value (LTV) ratio

Calculated based on the total facility amount for the residential mortgage and RBC Homeline Plan ® product divided by the value of the related residential property.

Master netting agreement

An agreement between us and a counterparty designed to reduce the credit risk of multiple derivative transactions through the creation of a legal right of offset of exposure in the event of a default.

Net interest income

The difference between what is earned on assets such as loans and securities and what is paid on liabilities such as deposits and subordinated debentures.

Net interest margin (on average earning assets, net)

Calculated as net interest income divided by average earning assets, net.

Net Stable Funding Ratio (NSFR)

The Net Stable Funding Ratio is a Basel III metric that measures the sufficiency of available stable funding to meet the minimum coverage level of required stable funding.

Normal course issuer bid (NCIB)

A program for the repurchase of our own shares for cancellation through a stock exchange that is subject to the various rules of the relevant stock exchange and securities commission.

Notional amount

The contract amount used as a reference point to calculate payments for derivatives.

Off-balance sheet financial instruments

A variety of arrangements offered to clients, which include credit derivatives, written put options, backstop liquidity facilities, stable value products, financial standby letters of credit, performance guarantees, credit enhancements, mortgage loans sold with recourse, commitments to extend credit, securities lending, documentary and commercial letters of credit, note issuances and revolving underwriting facilities, securities lending indemnifications and indemnifications.

Office of the Superintendent of Financial Institutions Canada (OSFI)

The primary regulator of federally chartered financial institutions and federally administered pension plans in Canada. OSFI’s mission is to safeguard policyholders, depositors and pension plan members from undue loss.

Operating leverage

The difference between our revenue growth rate and non-interest expense growth rate.

Options

A contract or a provision of a contract that gives one party (the option holder) the right, but not the obligation, to perform a specified transaction with another party (the option issuer or option writer) according to specified terms.

Provision for credit losses (PCL)

The amount charged to income necessary to bring the allowance for credit losses to a level

determined appropriate by management. This includes provisions on performing and impaired financial assets.

RBC Homeline Plan ® products

This is comprised of residential mortgages and secured personal loans whereby the borrower pledges real estate as collateral.

Repurchase agreements

These involve the sale of securities for cash and the simultaneous repurchase of the securities for value at a later date. These transactions normally do not constitute economic sales and therefore are treated as collateralized financing transactions.

Return on common equity (ROE)

Net income available to common shareholders, expressed as a percentage of average common equity.

Reverse repurchase agreements

These involve the purchase of securities for cash and the simultaneous sale of the securities for value at a later date. These transactions normally do not constitute economic sales and therefore are treated as collateralized financing transactions.

Risk-weighted assets (RWA)

Assets adjusted by a regulatory risk-weight factor to reflect the riskiness of on and off-balance sheet exposures. Certain assets are not risk-weighted, but deducted from capital. The calculation is defined by guidelines issued by OSFI. For more details, refer to the Capital management section.

Securities lending

Transactions in which the owner of securities agrees to lend it under the terms of a prearranged contract to a borrower for a fee. Collateral for the loan consists of either high quality securities or cash and collateral value must be at least equal to the market value of the loaned securities. Borrowers pay a negotiated fee for loans collateralized by securities, whereas for cash collateral lenders pay borrowers interest at a negotiated rate and reinvest the cash collateral to earn a return. An intermediary such as a bank often acts as agent lender for the owner of the security in return for a share of the revenue earned by the owner from lending securities. Most often, agent lenders indemnify the owner against the risk of the borrower’s failure to redeliver the loaned securities – counterparty

credit risk if a borrower defaults and market risk if the value of the non-cash collateral declines. The agent lender does not indemnify against the investment risk of re-investing cash collateral which is borne by the owner.

Securities sold short

A transaction in which the seller sells securities and then borrows the securities in order to deliver them to the purchaser upon settlement. At a later date, the seller buys identical securities in the market to replace the borrowed securities.

Securitization

The process by which various financial assets are packaged into newly issued securities backed by these assets.

Standardized Approach

Risk weights prescribed by OSFI are used to calculate risk-weighted assets for the credit risk exposures. Credit assessments by OSFI-recognized external credit rating agencies of S&P, Moody’s, Fitch and DBRS are used to risk-weight our Sovereign and Bank exposures based on the standards and guidelines issued by OSFI. For our Business and Retail exposures, we use the standard risk weights prescribed by OSFI.

Structured entities

A structured entity is an entity in which voting or similar rights are not the dominant factor in deciding who controls the entity, such as when the activities that significantly affect the entity’s returns are directed by means of contractual arrangements. Structured entities often have restricted activities, narrow and well defined objectives, insufficient equity to finance their activities, and financing in the form of multiple contractually-linked instruments.

Taxable equivalent basis (teb)

Income from certain specified tax advantaged sources (eligible Canadian taxable corporate dividends) is increased to a level that would make it comparable to income from taxable sources. There is an offsetting adjustment in the tax provision, thereby generating the same after-tax net income.

Tier 1 capital

Tier 1 capital comprises predominantly of CET1 capital, with additional Tier 1 items such as preferred shares, limited recourse capital notes and non-controlling interests in subsidiaries Tier 1 instruments.

Tier 2 capital

Tier 2 capital consists mainly of subordinated debentures that meet certain criteria, certain loan loss allowances and non-controlling interests in subsidiaries’ Tier 2 instruments.

Total capital and total capital ratio

Total capital is defined as the total of Tier 1 and Tier 2 capital. The total capital ratio is calculated by dividing total capital by risk-weighted assets.

Tranche

A security class created whereby the risks and returns associated with a pool of assets are packaged into several classes of securities offering different risk and return profiles from those of the underlying asset pool. Tranches are typically rated by ratings agencies, and reflect both the credit quality of underlying collateral as well as the level of protection based on the tranches’ relative subordination.

Unattributed capital

Unattributed capital represents common equity in excess of common equity attributed to our business segments and is reported in the Corporate Support segment.

Value-at-Risk (VaR)

A generally accepted risk-measurement concept that uses statistical models based on historical information to estimate within a given level of confidence the maximum loss in market value we would experience in our trading portfolio from an adverse one-day movement in market rates and prices.

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EDTF recommendations index

We aim to present transparent, high-quality risk disclosures by providing disclosures in this 2021 Annual Report and Supplementary Financial Information package (SFI), and Pillar 3 Report, in accordance with recommendations from the FSB’s Enhanced Disclosure Task Force (EDTF). Information within the SFI and Pillar 3 Report is not and should not be considered incorporated by reference into this 2021 Annual Report.

The following index summarizes our disclosure by EDTF recommendation:

			Location of disclosure
Type of Risk	Recommendation	Disclosure	Annual Report page	SFI page
General	1	Table of contents for EDTF risk disclosure	123	1
	2	Define risk terminology and measures	55-60, 121-122	–
	3	Top and emerging risks	52-54	–
	4	New regulatory ratios	100-105	–
Risk governance, risk management and business model	5	Risk management organization	55-60	–
	6	Risk culture	56-60	–
	7	Risk in the context of our business activities	108	–
	8	Stress testing	57-58, 73	–
Capital adequacy and risk-weighted assets (RWA)	9	Minimum Basel III capital ratios and Domestic systemically important bank surcharge	100-105	–
	10	Composition of capital and reconciliation of the accounting balance sheet to the regulatory balance sheet	–	*
	11	Flow statement of the movements in regulatory capital	–	20
	12	Capital strategic planning	100-105	–
	13	RWA by business segments	–	21
	14	Analysis of capital requirement, and related measurement model information	61-64	*
	15	RWA credit risk and related risk measurements	–	*
	16	Movement of risk-weighted assets by risk type	–	21
	17	Basel back-testing	57, 61	32
Liquidity	18	Quantitative and qualitative analysis of our liquidity reserve	80-81, 85-86	–
Funding	19	Encumbered and unencumbered assets by balance sheet category, and contractual obligations for rating downgrades	81, 84	–
	20	Maturity analysis of consolidated total assets, liabilities and off-balance sheet commitments analyzed by remaining contractual maturity at the balance sheet date	88-89	–
	21	Sources of funding and funding strategy	81-83	–
Market risk	22	Relationship between the market risk measures for trading and non-trading portfolios and the balance sheet	77-78	–
	23	Decomposition of market risk factors	72-76	–
	24	Market risk validation and back-testing	73	–
	25	Primary risk management techniques beyond reported risk measures and parameters	72-76	–
Credit risk	26	Bank’s credit risk profile	60-72, 170-177	22-32, *
		Quantitative summary of aggregate credit risk exposures that reconciles to the balance sheet	115-120	*
	27	Policies for identifying impaired loans	62-65, 110, 143-146	–
	28	Reconciliation of the opening and closing balances of impaired loans and impairment allowances during the year	–	24, 29
	29	Quantification of gross notional exposure for OTC derivatives or exchange-traded derivatives	66	33
	30	Credit risk mitigation, including collateral held for all sources of credit risk	64-65	*
Other	31	Other risk types	91-99	–
	32	Publicly known risk events	94-95, 215-216	–
*	These disclosure requirements are satisfied or partially satisfied by disclosures provided in our Pillar 3 Report for the quarter ended October 31, 2021 and for the year ended October 31, 2020.
---	---

Index for Enhanced Disclosure Task Force recommendations Royal Bank of Canada: Annual Report 2021 123

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REPORTS AND CONSOLIDATED FINANCIAL STATEMENTS
Reports
---	---
125	Management’s Responsibility for Financial Reporting
125	Management’s Report on Internal Control over Financial Reporting
130	Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements
133	Consolidated Balance Sheets
134	Consolidated Statements of Income
135	Consolidated Statements of Comprehensive Income
136	Consolidated Statements of Changes in Equity
137	Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements
138	Note 1	General information
138	Note 2	Summary of significant accounting policies, estimates and judgments
153	Note 3	Fair value of financial instruments
166	Note 4	Securities
170	Note 5	Loans and allowance for credit losses
177	Note 6	Derecognition of financial assets
178	Note 7	Structured entities
182	Note 8	Derivative financial instruments and hedging activities
192	Note 9	Premises and equipment
193	Note 10	Goodwill and other intangible assets
195	Note 11	Joint ventures and associated companies
196	Note 12	Other assets
196	Note 13	Deposits
197	Note 14	Insurance
199	Note 15	Segregated funds
200	Note 16	Employee benefits – Pension and other post-employment benefits
204	Note 17	Other liabilities
205	Note 18	Subordinated debentures
205	Note 19	Equity
208	Note 20	Share-based compensation
210	Note 21	Income taxes
212	Note 22	Earnings per share
213	Note 23	Guarantees, commitments, pledged assets and contingencies
215	Note 24	Legal and regulatory matters
216	Note 25	Related party transactions
218	Note 26	Results by business segment
220	Note 27	Nature and extent of risks arising from financial instruments segment
221	Note 28	Capital management
221	Note 29	Offsetting financial assets and financial liabilities
223	Note 30	Recovery and settlement of on-balance sheet assets and liabilities
224	Note 31	Parent company information
225	Note 32	Subsequent events

124 Royal Bank of Canada: Annual Report 2021 Consolidated Financial Statements

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Management’s Responsibility for Financial Reporting

The accompanying consolidated financial statements of Royal Bank of Canada were prepared by management, which is responsible for the integrity and fairness of the information presented, including the many amounts that must of necessity be based on estimates and judgments. These consolidated financial statements were prepared in accordance with the Bank Act (Canada) and International Financial Reporting Standards as issued by the International Accounting Standards Board. Financial information appearing throughout our Management’s Discussion and Analysis is consistent with these consolidated financial statements.

Our internal controls are designed to provide reasonable assurance that transactions are authorized, assets are safeguarded and proper records are maintained. These controls include quality standards in hiring and training of employees, policies and procedures manuals, a corporate code of conduct and accountability for performance within appropriate and well-defined areas of responsibility.

The system of internal controls is further supported by a compliance function, which is designed to ensure that we and our employees comply with securities legislation and conflict of interest rules, and by an internal audit staff, which conducts periodic audits of all aspects of our operations.

The Board of Directors oversees management’s responsibilities for financial reporting through an Audit Committee, which is composed entirely of independent directors. This Committee reviews our consolidated financial statements and recommends them to the Board for approval. Other key responsibilities of the Audit Committee include reviewing our existing internal control procedures and planned revisions to those procedures, and advising the directors on auditing matters and financial reporting issues. Our Chief Compliance Officer and Chief Internal Auditor have full and unrestricted access to the Audit Committee.

The Office of the Superintendent of Financial Institutions Canada (OSFI) examines and inquires into our business and affairs as deemed necessary to determine whether the provisions of the Bank Act are being complied with, and that we are in sound financial condition. In carrying out its mandate, OSFI strives to protect the rights and interests of our depositors and creditors.

PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm appointed by our shareholders upon the recommendation of the Audit Committee and Board, has performed an independent audit of the consolidated financial statements in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States) as stated in their Independent Auditor’s Report and Report of Independent Registered Public Accounting Firm, respectively. The auditors have full and unrestricted access to the Audit Committee to discuss their audit and related findings.

David I. McKay

President and Chief Executive Officer

Nadine Ahn

Chief Financial Officer

Toronto, November 30, 2021

Management’s Report on Internal Control over Financial Reporting

Management of Royal Bank of Canada is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, the President and Chief Executive Officer and Chief Financial Officer and effected by the Board of Directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. It includes those policies and procedures that:

•	Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions related to and dispositions of our assets;
•	Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and our receipts and expenditures are made only in accordance with authorizations of our management and directors; and
---	---
•	Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements.
---	---

Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements on a timely basis. Also, projections of any evaluation of the effectiveness of internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management evaluated, under the supervision of and with the participation of the President and Chief Executive Officer and Chief Financial Officer, the effectiveness of our internal control over financial reporting as of October 31, 2021, based on the criteria set forth in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, management concluded that, as of October 31, 2021, internal control over financial reporting was effective based on the criteria established in the Internal Control – Integrated Framework (2013).

The effectiveness of our internal control over financial reporting as of October 31, 2021, has been audited by PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm, as stated in their Report of Independent Registered Public Accounting Firm, which appears herein.

David I. McKay

President and Chief Executive Officer

Nadine Ahn

Chief Financial Officer

Toronto, November 30, 2021

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Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors of Royal Bank of Canada

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Royal Bank of Canada and its subsidiaries (together, the Bank) as of October 31, 2021 and 2020, and the related consolidated statements of income, comprehensive income, changes in equity and cash flows for the years then ended, including the related notes (collectively referred to as the consolidated financial statements). We also have audited the Bank’s internal control over financial reporting as of October 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Bank as of October 31, 2021 and 2020, and its financial performance and its cash flows for the years then ended in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board. Also in our opinion, the Bank maintained, in all material respects, effective internal control over financial reporting as of October 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the COSO.

Basis for Opinions

The Bank’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the Bank’s consolidated financial statements and on the Bank’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Bank in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

An entity’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. An entity’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the entity; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the entity are being made only in accordance with authorizations of management and directors of the entity; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the entity’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Allowance for Credit Losses (ACL)

As described in Notes 2, 4 and 5 to the consolidated financial statements, the Bank’s ACL for financial assets was $4,471 million as of October 31, 2021 and represents management’s estimate of expected credit losses on financial assets as of the balance sheet date. Performing financial assets are categorized as Stage 1 from initial recognition to the date on which the asset has experienced a significant increase in credit risk relative to its initial recognition. Performing financial assets transfer into Stage 2 following a significant increase in credit risk relative to the initial recognition. Financial assets are categorized as Stage 3 when considered to be credit-impaired. As disclosed by management, the measurement of expected credit losses is a complex

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calculation that involves a large number of interrelated inputs and assumptions such as the financial asset’s probability of default, loss given default and exposure at default, which are modelled based on macroeconomic variables, and discounted to the reporting date. Management’s estimation of expected credit losses in Stage 1 and Stage 2 considers five distinct future macroeconomic scenarios, each of which includes a forecast of all relevant macroeconomic variables, designed to capture a wide range of possible outcomes, and which are probability-weighted according to management’s expectation of the relative likelihood of the range of outcomes that each scenario represents at the reporting date. As disclosed in Note 5, while the global economic recovery has continued throughout fiscal 2021, momentum has waned over the year amid ongoing uncertainty regarding the extent and duration of the impacts of the COVID-19 pandemic. As a result, the estimation of the ACL continues to require the application of heightened judgment, as there is a higher than usual degree of uncertainty and the inputs used are inherently subject to change, which may materially change the estimate of Stage 1 and Stage 2 ACL in future periods. The possibility of a more prolonged recovery period, including monetary policy responses to elevated inflation rates which may increase credit risk, has been reflected in management’s general downside scenario. To address the uncertainties inherent in the current and future environment and to reflect relevant risk factors not captured in the Bank’s modelled results, management applied expert credit judgment in quantitative and qualitative adjustments for the impacts of the unprecedented macroeconomic environment, including the impact of government support programs in offsetting the effect of COVID-19 related unemployment on the economy and on mitigating the losses for the sectors most sensitive to the economic impact of the COVID-19 pandemic.

The principal considerations for our determination that performing procedures relating to the ACL is a critical audit matter are: (i) there was significant judgment required by management when a) designing future macroeconomic scenarios, b) forecasting macroeconomic variables, c) probability-weighting scenarios and d) applying expert credit judgment to reflect characteristics not already considered in the models; (ii) there was a high degree of estimation uncertainty due to the ongoing uncertainty regarding the extent and duration of the impacts of the COVID-19 pandemic, which also led to a high degree of auditor judgment; (iii) there was significant audit effort necessary to evaluate audit evidence as the estimation of the ACL is a complex calculation that involves a large volume of data, interrelated inputs and assumptions, some of which are model-based; and (iv) the audit effort included the use of professionals with specialized skill and knowledge.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the estimation of the ACL, incorporating consideration of the ongoing uncertainty regarding the extent and duration of the impacts of the COVID-19 pandemic, including controls over: (i) the probability of default, loss given default and exposure at default models; (ii) the design of multiple future macroeconomic scenarios, the forecasting of macroeconomic variables, and the probability-weighting of these scenarios; (iii) the completeness and accuracy of the data inputs underlying the ACL calculation; and (iv) the application of expert credit judgment. These procedures also included, among others, testing management’s process for estimating the Stage 1 and Stage 2 ACL, including their consideration of the ongoing uncertainty regarding the extent and duration of the impacts of the COVID-19 pandemic. This consisted of (i) testing the completeness, accuracy, and relevance of underlying data; and (ii) with the assistance of professionals with specialized skill and knowledge, evaluating: (a) the appropriateness of the probability of default, loss given default and exposure at default models used in the estimation of the Stage 1 and Stage 2 ACL, (b) the reasonableness of significant inputs and assumptions used in the estimation of the ACL related to: 1) the design of future macroeconomic scenarios, 2) the forecasted macroeconomic variables, 3) the probability-weights assigned to the scenarios, (c) the appropriateness of the ACL calculation, and (d) management’s application of expert credit judgment.

Goodwill Impairment Assessment of the Caribbean Banking Cash Generating Unit (CGU)

As described in Notes 2 and 10 to the consolidated financial statements, the goodwill allocated to the Caribbean Banking CGU was $1,600 million. Management conducts a goodwill impairment test as of August 1 of each year by comparing the carrying amount of each Cash Generating Unit (CGU) to its recoverable amount. The recoverable amount of a CGU is represented by its value in use (VIU), except in circumstances where the carrying amount of a CGU exceeds its VIU. In such cases, the greater of the CGU’s fair value less costs of disposal (FVLCD) and its VIU is the recoverable amount. Management estimated the recoverable amount of the Caribbean Banking CGU based on its FVLCD. Management calculated the FVLCD using a discounted cash flow method that projects future cash flows over a 5-year period based on management forecasts, adjusted to approximate the considerations of a prospective third-party buyer. Cash flows beyond the initial 5-year period are assumed by management to increase at a constant rate using a nominal long-term growth rate. The discount rate used to determine the present value of the Caribbean Banking CGU’s projected future cash flows is based on the bank-wide cost of capital, adjusted for the risks to which the CGU is exposed. As disclosed by management, with the improved economic environment in 2021, tempered by continued uncertainty related to COVID-19, the recoverable amount of the Caribbean Banking CGU has increased. As of August 1, 2021, management determined that the recoverable amount was 123% of its carrying amount. Management also considered reasonably possible alternative scenarios, including market comparable transactions, which yielded valuations ranging from a material surplus to an immaterial deficit. Management uses significant judgment to determine inputs to the discounted cash flow model. If the future cash flows and other assumptions in future periods deviate significantly from the current amounts used in management’s impairment testing, the value of goodwill could become impaired.

The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment of the Caribbean Banking CGU is a critical audit matter are: (i) there was significant judgment required by management when determining the recoverable amount of the CGU, including projecting future cash flows; (ii) there was a high degree of auditor judgment and subjectivity in performing procedures over management’s calculation of the recoverable amount of the CGU, and evaluating audit evidence; and (iii) the audit effort included the use of professionals with specialized skill and knowledge.

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(ii) testing the completeness, accuracy, and relevance of underlying data used in the model; (iii) evaluating the reasonableness of assumptions used by management, related to future cash flows, which involved evaluating the consistency with (a) current and past performance of the CGU, (b) external market data and industry data, and (c) evidence obtained in other areas of the audit; and iv) evaluating consistency of the recoverable amount with market comparable transactions. Professionals with specialized skill and knowledge were used to assist in evaluating (i) the appropriateness of management’s discounted cash flow model; and ii) the consistency of the recoverable amount of the CGU with market comparable transactions.

Uncertain Tax Positions

As described in Note 2 to the consolidated financial statements, the Bank is subject to income tax laws in various jurisdictions where it operates and the complex tax laws are potentially subject to different interpretations by management and the relevant taxation authorities. As disclosed by management, significant judgment is required in the interpretation of the relevant tax laws, and in assessing the probability of acceptance of the Bank’s tax positions to determine tax provisions, which includes management’s best estimate of uncertain tax positions that are under audit or appeal by the relevant taxation authorities. Management performs a review on a quarterly basis to incorporate its best assessment based on information available, but additional liability and income tax expense could result based on the acceptance of the Bank’s tax positions by the relevant tax authorities. In some cases, as described in Note 21, the Bank has received reassessments denying the tax deductibility of dividends from transactions including those with Tax Indifferent Investors.

The principal considerations for our determination that performing procedures relating to the uncertain tax positions is a critical audit matter are that: (i) there was significant judgment required by management, including a high degree of estimation uncertainty, when a) interpreting the relevant tax laws, and b) assessing the probability of acceptance of the Bank’s tax positions, which includes management’s best estimate of tax positions that are under audit or appeal by relevant taxation authorities; (ii) there was a high degree of auditor judgment and subjectivity in performing procedures to evaluate the uncertain tax positions; and (iii) the audit effort included the use of professionals with specialized skill and knowledge.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the evaluation of uncertain tax positions and the impact on tax provisions. These procedures also included, among others, testing management’s process used in (i) assessing the probability of acceptance of the Bank’s tax positions; and (ii) estimating provisions relating to uncertain tax positions, if applicable, which reflects management’s best estimate of tax positions that are under audit or appeal by relevant taxation authorities. This involved: (i) evaluating the appropriateness of the methods used; (ii) testing the completeness, accuracy, and relevance of underlying data used; (iii) reviewing correspondence with relevant taxation authorities; (iv) making inquiries of the Bank’s internal and external legal counsel; and (v) evaluating, with the assistance of professionals with specialized skill and knowledge, the application of relevant tax laws, whether it is probable that the relevant tax authorities will accept the tax positions, and evidence used by management.

/s/ PricewaterhouseCoopers LLP

Chartered Professional Accountants, Licensed Public Accountants

Toronto, Canada

November 30, 2021

We have served as the Bank’s auditor since 2016.

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Consolidated Balance Sheets
	As at
---	---	---	---	---	---	---
(Millions of Canadian dollars)	October 31<br> <br>2021			October 31<br> <br>2020
Assets
Cash and due from banks	$	113,846		$	118,888
Interest-bearing deposits with banks		79,638			39,013
Securities<br> <br>(Note 4)
Trading		139,240			136,071
Investment, net of applicable allowance		145,484			139,743
		284,724			275,814
Assets purchased under reverse repurchase agreements and securities borrowed		307,903			313,015
Loans<br> <br>(Note 5)
Retail		503,598			457,976
Wholesale		218,066			208,655
		721,664			666,631
Allowance for loan losses <br>(Note 5)		(4,089	)		(5,639	)
		717,575			660,992
Segregated fund net assets<br> <br>(Note 15)		2,666			1,922
Other
Customers’ liability under acceptances		19,798			18,507
Derivatives <br>(Note 8)		95,541			113,488
Premises and equipment <br>(Note 9)		7,424			7,934
Goodwill <br>(Note 10)		10,854			11,302
Other intangibles <br>(Note 10)		4,471			4,752
Other assets <br>(Note 12)		61,883			58,921
		199,971			214,904
Total assets	$	1,706,323		$	1,624,548
Liabilities and equity
Deposits<br> <br>(Note 13)
Personal	$	362,488		$	343,052
Business and government		696,353			624,311
Bank		41,990			44,522
		1,100,831			1,011,885
Segregated fund net liabilities<br> <br>(Note 15)		2,666			1,922
Other
Acceptances		19,873			18,618
Obligations related to securities sold short		37,841			29,285
Obligations related to assets sold under repurchase agreements and securities loaned		262,201			274,231
Derivatives <br>(Note 8)		91,439			109,927
Insurance claims and policy benefit liabilities <br>(Note 14)		12,816			12,215
Other liabilities <br>(Note 17)		70,301			69,831
		494,471			514,107
Subordinated debentures<br> <br>(Note 18)		9,593			9,867
Total liabilities		1,607,561			1,537,781
Equity attributable to shareholders
Preferred shares and other equity instruments <br>(Note 19)		6,684			5,945
Common shares <br>(Note 19)		17,655			17,499
Retained earnings		71,795			59,806
Other components of equity		2,533			3,414
		98,667			86,664
Non-controlling interests		95			103
Total equity		98,762			86,767
Total liabilities and equity	$	1,706,323		$	1,624,548

The accompanying notes are an integral part of these Consolidated Financial Statements.

David I. McKay	Frank Vettese
President and Chief Executive Officer	Director

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Consolidated Statements of Income
	For the year ended
---	---	---	---	---	---
(Millions of Canadian dollars, except per share amounts)	October 31<br> <br>2021			October 31<br> <br>2020
Interest and dividend income<br> <br>(Note 3)
Loans	$	21,654		$	23,420
Securities		4,877			6,488
Assets purchased under reverse repurchase agreements and securities borrowed		1,309			4,668
Deposits and other		305			307
	28,145			34,883
Interest expense<br> <br>(Note 3)
Deposits and other		5,448			8,783
Other liabilities		2,516			4,985
Subordinated debentures		179			280
		8,143			14,048
Net interest income		20,002			20,835
Non-interest income
Insurance premiums, investment and fee income <br>(Note 14)		5,600			5,361
Trading revenue		1,183			1,239
Investment management and custodial fees		7,132			6,101
Mutual fund revenue		4,251			3,712
Securities brokerage commissions		1,538			1,439
Service charges		1,858			1,842
Underwriting and other advisory fees		2,692			2,319
Foreign exchange revenue, other than trading		1,066			1,012
Card service revenue		1,078			969
Credit fees		1,530			1,321
Net gains on investment securities		145			90
Share of profit in joint ventures and associates <br>(Note 11)		130			77
Other		1,488			864
		29,691			26,346
Total revenue		49,693			47,181
Provision for credit losses<br> <br>(Notes 4 and 5)		(753	)		4,351
Insurance policyholder benefits, claims and acquisition expense<br> <br>(Note 14)		3,891			3,683
Non-interest expense
Human resources <br>(Note 16 and 20)		16,539			15,252
Equipment		1,986			1,907
Occupancy		1,584			1,660
Communications		931			989
Professional fees		1,351			1,330
Amortization of other intangibles <br>(Note 10)		1,287			1,273
Other		2,246			2,347
		25,924			24,758
Income before income taxes		20,631			14,389
Income taxes <br>(Note 21)		4,581			2,952
Net income	$	16,050		$	11,437
Net income attributable to:
Shareholders	$	16,038		$	11,432
Non-controlling interests		12			5
	$	16,050		$	11,437
Basic earnings per share<br><br>(in dollars) (Note 22)	$	11.08		$	7.84
Diluted earnings per share<br><br>(in dollars) (Note 22)		11.06			7.82
Dividends per common share<br> <br>(in dollars)		4.32			4.29

The accompanying notes are an integral part of these Consolidated Financial Statements.

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Consolidated Statements of Comprehensive Income
	For the year ended
---	---	---	---	---	---	---
(Millions of Canadian dollars)	October 31<br> <br>2021			October 31<br> <br>2020
Net income	$	16,050		$	11,437
Other comprehensive income (loss), net of taxes<br><br>(Note 21)
Items that will be reclassified subsequently to income:
Net change in unrealized gains (losses) on debt securities and loans at fair value through other comprehensive income
Net unrealized gains (losses) on debt securities and loans at fair value through other comprehensive income		177			(24	)
Provision for credit losses recognized in income		(9	)		13
Reclassification of net losses (gains) on debt securities and loans at fair value through other comprehensive income to income		(117	)		(161	)
		51			(172	)
Foreign currency translation adjustments
Unrealized foreign currency translation gains (losses)		(4,316	)		810
Net foreign currency translation gains (losses) from hedging activities		1,740			(397	)
Reclassification of losses (gains) on foreign currency translation to income		(7	)		(21	)
Reclassification of losses (gains) on net investment hedging activities to income		(1	)		21
		(2,584	)		413
Net change in cash flow hedges
Net gains (losses) on derivatives designated as cash flow hedges		1,373			(1,145	)
Reclassification of losses (gains) on derivatives designated as cash flow hedges to income		272			72
		1,645			(1,073	)
Items that will not be reclassified subsequently to income:
Remeasurements of employee benefit plans		2,251			(68	)
Net fair value change due to credit risk on financial liabilities designated at fair value through profit or loss		55			(263	)
Net gains (losses) on equity securities designated at fair value through other comprehensive income		38			28
		2,344			(303	)
Total other comprehensive income (loss), net of taxes		1,456			(1,135	)
Total comprehensive income (loss)	$	17,506		$	10,302
Total comprehensive income attributable to:
Shareholders	$	17,501		$	10,295
Non-controlling interests		5			7
	$	17,506		$	10,302

The accompanying notes are an integral part of these Consolidated Financial Statements.

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Consolidated Statements of Changes in Equity
	For the year ended October 31, 2021
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
															Other components of equity
(Millions of Canadian dollars)	Preferred<br> shares and<br> other equity<br> instruments			Common<br> shares		Treasury –<br> preferred<br> <br>shares and<br> other equity<br> instruments			Treasury –<br> common<br> shares			Retained<br> earnings			FVOCI<br> securities<br> and loans			Foreign<br> currency<br> translation			Cash flow<br> hedges			Total other<br> components<br> of equity			Equity<br> attributable to<br> shareholders			Non-controlling<br> interests			Total<br> equity
Balance at beginning of period	$	5,948		$	17,628	$	(3	)	$	(129	)	$	59,806		$	(139	)	$	4,632		$	(1,079	)	$	3,414		$	86,664		$	103		$	86,767
Changes in equity
Issues of share capital and other equity instruments		2,250			100		–			–			(5	)		–			–			–			–			2,345			–			2,345
Common shares purchased for cancellation		–			–		–			–			–			–			–			–			–			–			–			–
Redemption of preferred shares and other equity instruments		(1,475	)		–		–			–			–			–			–			–			–			(1,475	)		–			(1,475	)
Sales of treasury shares and other equity instruments		–			–		647			4,116			–			–			–			–			–			4,763			–			4,763
Purchases of treasury shares and other equity instruments		–			–		(683	)		(4,060	)		–			–			–			–			–			(4,743	)		–			(4,743	)
Share-based compensation awards		–			–		–			–			(6	)		–			–			–			–			(6	)		–			(6	)
Dividends on common shares		–			–		–			–			(6,158	)		–			–			–			–			(6,158	)		–			(6,158	)
Dividends on preferred shares and distributions on other equity instruments		–			–		–			–			(257	)		–			–			–			–			(257	)		(3	)		(260	)
Other		–			–		–			–			33			–			–			–			–			33			(10	)		23
Net income		–			–		–			–			16,038			–			–			–			–			16,038			12			16,050
Total other comprehensive income (loss), net of taxes		–			–		–			–			2,344			51			(2,577	)		1,645			(881	)		1,463			(7	)		1,456
Balance at end of period	$	6,723		$	17,728	$	(39	)	$	(73	)	$	71,795		$	(88	)	$	2,055		$	566		$	2,533		$	98,667		$	95		$	98,762
	For the year ended October 31, 2020
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
																Other components of equity
(Millions of Canadian dollars)	Preferred<br> shares and<br> other equity<br> instruments			Common<br> shares			Treasury –<br> preferred<br> shares and<br> other equity<br> instruments			Treasury –<br> common<br> shares			Retained<br> earnings			FVOCI<br> securities<br> and loans			Foreign<br> currency<br> translation		Cash flow<br> hedges			Total other<br> components<br> of equity			Equity<br> attributable to<br> shareholders			Non-controlling<br> interests			Total<br> equity
Balance at beginning of period	$	5,706		$	17,645		$	1		$	(58	)	$	55,874		$	33		$	4,221	$	(6	)	$	4,248		$	83,416		$	102		$	83,518
Changes in equity
Issues of share capital and other equity instruments		1,750			80			–			–			(5	)		–			–		–			–			1,825			–			1,825
Common shares purchased for cancellation		–			(97	)		–			–			(717	)		–			–		–			–			(814	)		–			(814	)
Redemption of preferred shares and other equity instruments		(1,508	)		–			–			–			–			–			–		–			–			(1,508	)		–			(1,508	)
Sales of treasury shares and other equity instruments		–			–			110			4,668			–			–			–		–			–			4,778			–			4,778
Purchases of treasury shares and other equity instruments		–			–			(114	)		(4,739	)		–			–			–		–			–			(4,853	)		–			(4,853	)
Share-based compensation awards		–			–			–			–			(3	)		–			–		–			–			(3	)		–			(3	)
Dividends on common shares		–			–			–			–			(6,111	)		–			–		–			–			(6,111	)		–			(6,111	)
Dividends on preferred shares and distributions on other equity instruments		–			–			–			–			(268	)		–			–		–			–			(268	)		(6	)		(274	)
Other		–			–			–			–			(93	)		–			–		–			–			(93	)		–			(93	)
Net income		–			–			–			–			11,432			–			–		–			–			11,432			5			11,437
Total other comprehensive income (loss), net of taxes		–			–			–			–			(303	)		(172	)		411		(1,073	)		(834	)		(1,137	)		2			(1,135	)
Balance at end of period	$	5,948		$	17,628		$	(3	)	$	(129	)	$	59,806		$	(139	)	$	4,632	$	(1,079	)	$	3,414		$	86,664		$	103		$	86,767

The accompanying notes are an integral part of these Consolidated Financial Statements.

136 Royal Bank of Canada: Annual Report 2021 Consolidated Financial Statements

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Consolidated Statements of Cash Flows
	For the year ended
---	---	---	---	---	---	---
(Millions of Canadian dollars)	October 31<br> <br>2021			October 31<br> <br>2020
Cash flows from operating activities
Net income	$	16,050		$	11,437
Adjustments for non-cash items and others
Provision for credit losses		(753	)		4,351
Depreciation		1,276			1,333
Deferred income taxes		581			(586	)
Amortization and impairment of other in<br>t<br>angibles		1,316			1,315
Net changes in investments in joint ventures and associates		(127	)		(73	)
Losses (Gains) on investment securities		(151	)		(218	)
Losses (Gains) on disposition of business		(26	)		8
Adjustments for net changes in operating assets and liabilities
Insurance claims and policy benefit liabilities		601			814
Net change in accrued interest receivable and payable		(509	)		(142	)
Current income taxes		1,738			18
Derivative assets		17,947			(11,928	)
Derivative liabilities		(18,488	)		11,384
Trading securities		(3,164	)		10,377
Loans, net of securitizations		(54,987	)		(45,639	)
Assets purchased under reverse repurchase agreements and securities borrowed		5,112			(6,054	)
Obligations related to assets sold under repurchase agreements and securities loaned		(12,030	)		47,645
Obligations related to securities sold short		8,556			(5,784	)
Deposits, net of securitizations		88,876			126,826
Brokers and dealers receivable and payable		35			2,301
Other		9,191			(8,566	)
Net cash from (used in) operating activities		61,044			138,819
Cash flows from investing activities
Change in interest-bearing deposits with banks		(40,618	)		(676	)
Proceeds from sales and maturities of investment securities		108,925			113,286
Purchases of investment securities		(123,547	)		(149,516	)
Net acquisitions of premises and equipment and other intangibles		(2,186	)		(2,629	)
Proceeds from dispositions		78			–
Cash used in acquisitions		–			(22	)
Net cash from (used in) investing activities		(57,348	)		(39,557	)
Cash flows from financing activities
Issuance of subordinated debentures		2,750			2,750
Repayment of subordinated debentures		(2,500	)		(3,000	)
Issue of common shares, net of issuance costs		90			70
Common shares purchased for cancellation		–			(814	)
Issue of preferred shares and other equity instruments, net of issuance costs		2,245			1,745
Redemption of preferred shares and other equity instruments		(1,475	)		(1,508	)
Sales of treasury shares		4,763			4,778
Purchases of treasury shares		(4,743	)		(4,853	)
Dividends paid on shares and distributions paid on other equity instruments		(6,420	)		(6,333	)
Dividends/distributions paid to non-controlling interests		(3	)		(6	)
Change in short-term borrowings of subsidiaries		(14	)		13
Repayment of lease liabilities		(621	)		(588	)
Net cash from (used in) financing activities		(5,928	)		(7,746	)
Effect of exchange rate changes on cash and due from banks		(2,810	)		1,062
Net change in cash and due from banks		(5,042	)		92,578
Cash and due from banks at beginning of period <br>(1)		118,888			26,310
Cash and due from banks at end of period<br><br>(1)	$	113,846		$	118,888
Cash flows from operating activities include:
Amount of interest paid	$	7,555		$	13,058
Amount of interest received		26,412			33,244
Amount of dividends received		2,575			2,753
Amount of income taxes paid		4,198			2,880
(1)	We are required to maintain balances with central banks and other regulatory authorities. The total balances were $2 billion as at October 31, 2021 (October 31, 2020 – $3 billion; October 31, 2019 – $3 billion).
---	---

The accompanying notes are an integral part of these Consolidated Financial Statements.

Consolidated Financial Statements Royal Bank of Canada: Annual Report 2021 137

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Note 1 General information

Royal Bank of Canada and its subsidiaries (the Bank) provide diversified financial services including Personal & Commercial Banking, Wealth Management, Insurance, Investor & Treasury Services and Capital Markets products and services on a global basis. Refer to Note 26 for further details on our business segments.

The parent bank, Royal Bank of Canada, is a Schedule I Bank under the Bank Act (Canada) incorporated and domiciled in Canada. Our corporate headquarters are located at Royal Bank Plaza, 200 Bay Street, Toronto, Ontario, Canada and our head office is located at 1 Place Ville-Marie, Montreal, Quebec, Canada. Our common shares are listed on the Toronto Stock Exchange and New York Stock Exchange with the ticker symbol RY.

These Consolidated Financial Statements are prepared in compliance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). Unless otherwise stated, monetary amounts are stated in Canadian dollars. Tabular information is stated in millions of dollars, except as noted. These Consolidated Financial Statements also comply with Subsection 308 of the Bank Act (Canada), which states that, except as otherwise specified by the Office of the Superintendent of Financial Institutions Canada (OSFI), our Consolidated Financial Statements are to be prepared in accordance with IFRS. Except where otherwise noted, the accounting policies outlined in Note 2 have been consistently applied to all periods presented.

On November 30, 2021, the Board of Directors authorized the Consolidated Financial Statements for issue.

Note 2 Summary of significant accounting policies, estimates and judgments

The significant accounting policies used in the preparation of these Consolidated Financial Statements, including the accounting requirements prescribed by OSFI, are summarized below. These accounting policies conform, in all material respects, to IFRS. Except where otherwise noted, the same accounting policies have been applied to all periods presented.

General

Use of estimates and assumptions

In preparing our Consolidated Financial Statements, management is required to make subjective estimates and assumptions that affect the reported amount of assets, liabilities, net income and related disclosures. Estimates made by management are based on historical experience and other assumptions that are believed to be reasonable. Key sources of estimation uncertainty include: determination of fair value of financial instruments, the allowance for credit losses, insurance claims and policy benefit liabilities, pensions and other post-employment benefits, income taxes, carrying value of goodwill and other intangible assets, and litigation provisions. Accordingly, actual results may differ from these and other estimates thereby impacting our future Consolidated Financial Statements. Refer to the relevant accounting policies in this Note for details on our use of estimates and assumptions.

Significant judgments

In preparation of these Consolidated Financial Statements, management is required to make significant judgments that affect the carrying amounts of certain assets and liabilities, and the reported amounts of revenues and expenses recorded during the period.

The COVID-19 pandemic has continued to evolve and the economic environment in which we operate could continue to be subject to sustained uncertainty, which could continue to impact our financial results. While the global economic recovery has continued, momentum has waned amid ongoing uncertainty regarding the extent and duration of the impacts of the COVID-19 pandemic. The current environment requires particularly complex judgments and estimates in certain areas. We are closely monitoring the changing conditions and their impacts.

Significant judgments have been made in the following areas and discussed as noted in the Consolidated Financial Statements:

Consolidation of structured entities	Note 2<br> <br>Note 7	Application of the effective interest method	Note 2
Fair value of financial instruments	Note 2<br> <br>Note 3	Derecognition of financial assets	Note 2<br> <br>Note 6
Allowance for credit losses	Note 2<br> <br>Note 4<br> <br>Note 5	Income taxes	Note 2<br> <br>Note 21
Employee benefits	Note 2<br> <br>Note 16	Provisions	Note 2<br> <br>Note 23<br> <br>Note 24
Goodwill and other intangibles	Note 2<br> <br>Note 10

Basis of consolidation

Our Consolidated Financial Statements include the assets and liabilities and results of operations of the parent company, Royal Bank of Canada, and its subsidiaries including certain structured entities, after elimination of intercompany transactions, balances, revenues and expenses.

138 Royal Bank of Canada: Annual Report 2021 Consolidated Financial Statements

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Consolidation

We are not deemed to control an entity when we exercise power over an entity in an agency capacity. In determining whether we are acting as an agent, we consider the overall relationship between us, the investee and other parties to the arrangement with respect to the following factors: (i) the scope of our decision-making power; (ii) the rights held by other parties; (iii) the remuneration to which we are entitled; and (iv) our exposure to variability of returns.

The determination of control is based on the current facts and circumstances and is continuously assessed. In some circumstances, different factors and conditions may indicate that different parties control an entity depending on whether those factors and conditions are assessed in isolation or in totality. Significant judgment is applied in assessing the relevant factors and conditions in totality when determining whether we control an entity. Specifically, judgment is applied in assessing whether we have substantive decision-making rights over the relevant activities and whether we are exercising our power as a principal or an agent.

We consolidate all subsidiaries from the date we obtain control and cease consolidation when an entity is no longer controlled by us. Our consolidation conclusions affect the classification and amount of assets, liabilities, revenues and expenses reported in our Consolidated Financial Statements.

Non-controlling interests in subsidiaries that we consolidate are shown on our Consolidated Balance Sheets as a separate component of equity which is distinct from equity attributable to our shareholders. The net income attributable to non-controlling interests is separately disclosed in our Consolidated Statements of Income.

Investments in joint ventures and associates

Our investments in associated corporations and limited partnerships over which we have significant influence are accounted for using the equity method. The equity method is also applied to our interests in joint ventures over which we have joint control. Under the equity method of accounting, investments are initially recorded at cost, and the carrying amount is increased or decreased to recognize our share of the investee’s net profit or loss, including our proportionate share of the investee’s Other comprehensive income (OCI), subsequent to the date of acquisition.

Non-current assets held for sale and discontinued operations

Non-current assets (and disposal groups) are classified as held for sale if their carrying amounts will be recovered principally through a sale transaction rather than through continuing use. This condition is satisfied when the asset is available for immediate sale in its present condition, management is committed to the sale, and it is highly probable to occur within one year. Non-current assets (and disposal groups) classified as held for sale are measured at the lower of their previous carrying amount and fair value less costs to sell and if significant, are presented separately from other assets on our Consolidated Balance Sheets.

A disposal group is classified as a discontinued operation if it meets the following conditions: (i) it is a component that can be distinguished operationally and financially from the rest of our operations and (ii) it represents either a separate major line of business or is part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations. Disposal groups classified as discontinued operations are presented separately from our continuing operations in our Consolidated Statements of Income.

Changes in accounting policies

Conceptual Framework for Financial Reporting (Conceptual Framework)

During the first quarter of 2021, we adopted the revised Conceptual Framework, which replaces the previous version of the

Conceptual Framework issued in 2010. The Conceptual Framework is not a standard, and does not override the concepts or requirements in any standard. It may be used to develop consistent accounting policies where there is no applicable standard

in place. The revisions include a few new concepts, updated definitions and recognition criteria for assets and liabilities and

clarifies some important concepts. These amendments had no material impact on our Consolidated Financial Statements.

Interest Rate Benchmark Reform

During the first quarter of 2021, we early adopted the Phase 2 amendments to IFRS 9 Financial Instruments , IAS 39 Financial

Instruments: Recognition and Measurement , IFRS 7 Financial Instruments: Disclosures , IFRS 4 Insurance contracts , and IFRS 16

Leases (the Amendments) in response to the market transition away from interbank offered rates (IBORs) to alternative benchmark rates (ABRs) as part of the IBOR reform (the Reform). The Amendments provide two key reliefs which are applicable to changes undertaken as a direct consequence of the Reform and where the transition from IBOR to ABRs rates are transacted on an economically equivalent basis:

•	For modifications of financial instruments carried at amortized cost resulting from the Reform which are transacted on an economically equivalent basis, the Amendments allow the benchmark interest rate change to be reflected prospectively in the effective interest rate of the instrument rather than as an immediate gain or loss.
•	If qualifying criteria are met, hedging relationships that are directly impacted by the Reform would be able to continue hedge accounting upon transition to ABRs.
---	---

Progress in and risks arising from the transition to ABRs

To manage our transition to ABRs, we have implemented a comprehensive enterprise-wide program and governance structure that addresses the key areas of impact including contract remediation, funding and liquidity planning, risk management, financial reporting and valuation, systems, processes and client education and communication. Transition activities are focused on two broad streams of work: (i) developing new ABR linked products, and (ii) conversion of existing LIBOR based contracts to ABRs. Our program timelines are ultimately dependent on broader market acceptance of products that reference the new ABRs and our clients’ readiness and ability to adopt the replacement products. Significant matters that we continue to evaluate include client product offerings, short and long-term funding strategies, and our hedging programs.

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Note 2 Summary of significant accounting policies, estimates and judgments<br><br>(continued)

We continue to work towards the recommended target dates for the cessation of LIBOR-based products provided by our regulators and are on track with our transition activities to move to ABRs. These target dates reflect the announcement made on March 5, 2021 when the Financial Conduct Authority, the regulator of the ICE Benchmark Administration (IBA) which administers LIBOR, announced the permanent cessation or loss of representativeness of all 35 LIBOR settings currently published by the IBA. As a result of this announcement, GBP LIBOR settings to which we have significant exposure will cease or lose their representativeness after December 31, 2021. USD LIBOR settings to which we have significant exposure will predominantly cease or lose their representativeness after June 30, 2023.

The following tables show the Bank’s significant exposures to financial instruments referencing benchmark interest rates subject to the Reform that have yet to transition to ABRs and maturing after December 31, 2021 for non-USD LIBOR instruments and after June 30, 2023 for USD LIBOR instruments. In the normal course of business, our derivative notional amounts may fluctuate with minimal impact to our IBOR conversion plans.


						November 1, 2020 <br>(1)
(Millions of Canadian dollars)		Non-derivative<br> financial liabilities<br><br>(3)		Derivative<br> notional<br><br>(4)		Non-derivative<br> financial assets <br>(2)		Non-derivative<br> financial liabilities <br>(3)		Derivative<br> notional <br>(4)
LIBOR	68,325	$	1,420	$	4,533,965	$	57,432	$	941	$	3,368,307
LIBOR	3,250		1,175		2,308,125		7,518		1,227		1,773,893
Other IBOR currencies	340		2,260		92,401		324		2,456		263,299
	71,915	$	4,855	$	6,934,491	$	65,274	$	4,624	$	5,405,499
Cross currency swaps
LIBOR – LIBOR	n.a.		n.a.	$	507,437		n.a.		n.a.	$	384,263
Other combinations	n.a.		n.a.		67,404		n.a.		n.a.		52,875
	n.a.		n.a.	$	574,841		n.a.		n.a.	$	437,138
	71,915	$	4,855	$	7,509,332	$	65,274	$	4,624	$	5,842,637

All values are in British Pounds.

(1)	Amounts have been updated from those previously presented to reflect the regulatory developments related to the USD LIBOR cessation date.
(2)	Non-derivative assets represent the drawn outstanding balance of Loans and the fair value of Securities.
---	---
(3)	Non-derivative liabilities represent Deposits.
---	---
(4)	The notional amount of derivative instruments excludes cross currency swaps with multiple LIBOR legs, which are presented separately in the Cross currency swaps section of this table.
---	---
n.a.	not applicable
---	---

The following table presents the undrawn balances of loan commitments referencing benchmark interest rates subject to the Reform.


(Millions of Canadian dollars)		November 1, 2020 <br>(1)
Authorized and committed undrawn commitments
LIBOR	122,437	$	82,054
LIBOR	3,026		7,533
Other IBOR currencies	5		1,370
	125,468	$	90,957

All values are in British Pounds.

(1)	Amounts have been updated from those previously presented to reflect the regulatory developments related to the USD LIBOR cessation date.

We continue to manage significant exposures to benchmarks that have no announced plans for cessation or further reform, including the Canadian Dollar Offered Rate (CDOR), EURO Interbank Offered Rate (EURIBOR) and Australian Bank Bill Swap Rate (BBSW), which are excluded from the tables above.

Financial Instruments

Classification of financial assets

Financial assets are measured at initial recognition at fair value, and are classified and subsequently measured at fair value through profit or loss (FVTPL), fair value through other comprehensive income (FVOCI) or amortized cost based on our business model for managing the financial instruments and the contractual cash flow characteristics of the instrument.

Debt instruments are measured at amortized cost if both of the following conditions are met and the asset is not designated as FVTPL: (a) the asset is held within a business model that is Held-to-Collect (HTC) as described below, and (b) the contractual terms of the instrument give rise to cash flows that are solely payments of principal and interest on the principal amount outstanding (SPPI).

Debt instruments are measured at FVOCI if both of the following conditions are met and the asset is not designated as FVTPL: (a) the asset is held within a business model that is Held-to-Collect-and-Sell (HTC&S) as described below, and (b) the contractual terms of the instrument give rise, on specified dates, to cash flows that are SPPI.

All other debt instruments are measured at FVTPL.

Equity instruments are measured at FVTPL, unless the asset is not held for trading purposes and we make an irrevocable election to designate the asset as FVOCI. This election is made on an instrument-by-instrument basis.

140 Royal Bank of Canada: Annual Report 2021 Consolidated Financial Statements

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Business model assessment

We determine our business models at the level that best reflects how we manage portfolios of financial assets to achieve our business objectives. Judgment is used in determining our business models, which is supported by relevant, objective evidence including:

•	How the economic activities of our businesses generate benefits, for example through trading revenue, enhancing yields or hedging funding or other costs and how such economic activities are evaluated and reported to key management personnel;
•	The significant risks affecting the performance of our businesses, for example, market risk, credit risk, or other risks as described in the Risk Management section of Management’s Discussion and Analysis, and the activities undertaken to manage those risks;
---	---
•	Historical and future expectations of sales of the loans or securities portfolios managed as part of a business model; and
---	---
•	The compensation structures for managers of our businesses, to the extent that these are directly linked to the economic performance of the business model.
---	---

Our business models fall into three categories, which are indicative of the key strategies used to generate returns:

•	HTC: The objective of this business model is to hold loans and securities to collect contractual principal and interest cash flows. Sales are incidental to this objective and are expected to be insignificant or infrequent.
•	HTC&S: Both collecting contractual cash flows and sales are integral to achieving the objective of the business model.
---	---
•	Other fair value business models: These business models are neither HTC nor HTC&S, and primarily represent business models where assets are <br>held-for-trading<br> or managed on a fair value basis.
---	---

SPPI assessment

Instruments held within a HTC or HTC&S business model are assessed to evaluate if their contractual cash flows are comprised of solely payments of principal and interest. SPPI payments are those which would typically be expected from basic lending arrangements. Principal amounts include par repayments from lending and financing arrangements, and interest primarily relates to basic lending returns, including compensation for credit risk and the time value of money associated with the principal amount outstanding over a period of time. Interest can also include other basic lending risks and costs (for example, liquidity risk, servicing or administrative costs) associated with holding the financial asset for a period of time, and a profit margin.

Where the contractual terms introduce exposure to risk or variability of cash flows that are inconsistent with a basic lending arrangement, the related financial asset is classified and measured at FVTPL.

Securities

Trading securities include all securities that are classified as FVTPL by nature and securities designated as FVTPL. Obligations to deliver trading securities sold but not yet purchased are recorded as liabilities and carried at fair value. Realized and unrealized gains and losses on these securities are generally recorded as Trading revenue or Non-interest income – Other. Dividends and interest income accruing on Trading securities are recorded in Interest income. Interest and dividends accrued on interest-bearing and equity securities sold short are recorded in Interest expense.

Investment securities include all securities classified as FVOCI and amortized cost. All investment securities are initially recorded at fair value and subsequently measured according to the respective classification.

Investment securities carried at amortized cost are measured using the effective interest method, and are presented net of any allowance for credit losses, calculated in accordance with our policy for Allowance for credit losses, as described below. Interest income, including the amortization of premiums and discounts on securities measured at amortized cost are recorded in interest income. Impairment gains or losses recognized on amortized cost securities are recorded in Provision for credit losses (PCL). When a debt instrument measured at amortized cost is sold, the difference between the sale proceeds and the amortized cost of the security at the time of the sale is recorded as Net gains on Investment securities in Non-interest income.

Debt securities carried at FVOCI are measured at fair value with unrealized gains and losses arising from changes in fair value included in Other components of equity. Impairment gains and losses are included in PCL and correspondingly reduce the accumulated changes in fair value included in Other components of equity. When a debt instrument measured at FVOCI is sold, the cumulative gain or loss is reclassified from Other components of equity to Net gains on Investment securities in Non-interest income.

Equity securities carried at FVOCI are measured at fair value. Unrealized gains and losses arising from changes in fair value are recorded in Other components of equity and not subsequently reclassified to profit or loss when realized. Dividends from FVOCI equity securities are recognized in Interest income.

We account for all of our securities using settlement date accounting and changes in fair value between the trade date and settlement date are reflected in income for securities measured at FVTPL, and changes in the fair value of securities measured at FVOCI between the trade and settlement dates are recorded in OCI except for changes in foreign exchange rates on debt securities, which are recorded in Non-interest income-Other.

Fair value option

A financial instrument with a reliably measurable fair value can be designated as FVTPL (the fair value option) on its initial recognition even if the financial instrument was not acquired or incurred principally for the purpose of selling or repurchasing. The fair value option can be used for financial assets if it eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise from measuring assets or liabilities, or recognizing related gains and losses on a different basis (an accounting mismatch). The fair value option can be elected for financial liabilities if: (i) the election eliminates an accounting mismatch; (ii) the financial liability is part of a portfolio that is managed on a fair value basis, in accordance with a documented risk management or investment strategy; or (iii) there is an embedded derivative in the financial or non-financial host contract and the derivative is not closely related to the host contract. These instruments cannot be reclassified out of the FVTPL category while they are held or issued.

Financial assets designated as FVTPL are recorded at fair value and any unrealized gain or loss arising due to changes in fair value is included in Trading revenue or Non-interest income – Other, depending on our business purpose for holding the financial asset.

Financial liabilities designated as FVTPL are recorded at fair value and fair value changes attributable to changes in our own credit risk are recorded in OCI. Own credit risk amounts recognized in OCI will not be reclassified subsequently to net income. The remaining fair value changes not attributable to changes in our own credit risk are recorded in Trading revenue or

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Note 2 Summary of significant accounting policies, estimates and judgments<br><br>(continued)

Non-interest income – Other, depending on our business purpose for holding the financial liability. Upon initial recognition, if we determine that presenting the effects of own credit risk changes in OCI would create or enlarge an accounting mismatch in net income, the full fair value change in our debt designated as FVTPL is recognized in net income. To make that determination, we assess whether we expect that the effects of changes in the liability’s credit risk will be offset in profit or loss by a change in the fair value of another financial instrument measured at FVTPL. Such an expectation is based on an economic relationship between the characteristics of the liability and the characteristics of the other financial instrument. The determination is made at initial recognition and is not reassessed. To determine the fair value adjustments on our debt instruments designated as FVTPL, we calculate the present value of the instruments based on the contractual cash flows over the term of the arrangement by using our effective funding rate at the beginning and end of t h e period.

Determination of fair value

The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We determine fair value by incorporating all factors that market participants would consider in setting a price, including commonly accepted valuation approaches.

The Board of Directors provides oversight on valuation of financial instruments, primarily through the Audit Committee and Risk Committee. The Audit Committee reviews the presentation and disclosure of financial instruments that are measured at fair value, while the Risk Committee assesses the adequacy of governance structures and control processes for the valuation of these instruments.

We have established policies, procedures and controls for valuation methodologies and techniques to ensure that fair value is reasonably estimated. Major valuation processes and controls include, but are not limited to, profit and loss decomposition, independent price verification (IPV) and model validation standards. These control processes are managed by either Finance or Group Risk Management and are independent of the relevant businesses and their trading functions. Profit and loss decomposition is a process to explain the fair value changes of certain positions and is performed daily for trading portfolios. All fair value instruments are subject to IPV, a process whereby trading function valuations are verified against external market prices and other relevant market data. Market data sources include traded prices, brokers and price vendors. We give priority to those third-party pricing services and prices having the highest and most consistent accuracy. The level of accuracy is determined over time by comparing third-party price values to traders’ or system values, to other pricing service values and, when available, to actual trade data. Quoted prices for identical instruments from pricing services or brokers are generally not adjusted unless there are issues such as stale prices. If multiple quotes for identical instruments are received, fair value is based on an average of the prices received or the quote from the most reliable vendor, after the outlier prices that fall outside of the pricing range are removed. Other valuation techniques are used when a price or quote is not available. Some valuation processes use models to determine fair value. We have a systematic and consistent approach to control the use of models. Valuation models are approved for use within our model risk management framework. The framework addresses, among other things, model development standards, validation processes and procedures and approval authorities. Model validation ensures that a model is suitable for its intended use and sets parameters for its use. All models are revalidated regularly by qualified personnel who are independent of the model design and development. Annually our model risk profile is reported to the Board of Directors.

IFRS 13 Fair Value Measurement permits an exception, through an accounting policy choice, to measure the fair value of a portfolio of financial instruments on a net open risk position basis when certain criteria are met. We have elected to use this policy choice to determine the fair value of certain portfolios of financial instruments, primarily derivatives, based on a net exposure to market or credit risk.

We record valuation adjustments to appropriately reflect counterparty credit quality of our derivative portfolio, differences between the actual counterparty collateral discount curve and standard overnight index swap (OIS) discounting for collateralized derivatives, funding valuation adjustments (FVA) for uncollateralized and under-collateralized over-the-counter (OTC) derivatives, unrealized gains or losses at inception of the transaction, bid-offer spreads, unobservable parameters and model limitations. These adjustments may be subjective as they require significant judgment in the input selection, such as implied probability of default (PD) and recovery rate, and are intended to arrive at a fair value that is determined based on assumptions that market participants would use in pricing the financial instrument. The realized price for a transaction may be different from its recorded value, previously estimated using management judgment. Valuation adjustments may therefore impact unrealized gains and losses recognized in Non-interest income – Trading revenue or Other.

Valuation adjustments are recorded for the credit risk of our derivative portfolios in order to arrive at their fair values. Credit valuation adjustments (CVA) take into account our counterparties’ creditworthiness, the current and potential future mark-to-market of transactions and the effects of credit mitigants such as master netting and collateral agreements. CVA amounts are derived from estimates of exposure at default (EAD), PD, recovery rates on a counterparty basis and market and credit factor correlations. EAD is the value of expected derivative related assets and liabilities at the time of default, estimated through modelling using underlying risk factors. PD is implied from the market prices for credit protection and the credit ratings of the counterparty. When market data is unavailable, it is estimated by incorporating assumptions and adjustments that market participants would use for determining fair value using these inputs. Correlation is the statistical measure of how credit and market factors may move in relation to one another. Correlation is estimated using historical data. CVA is calculated daily and changes are recorded in Non-interest income – Trading revenue.

FVA are also calculated to incorporate the cost and benefit of funding in the valuation of uncollateralized and under-collateralized OTC derivatives. Future expected cash flows of these derivatives are discounted to reflect the cost and benefit of funding the derivatives by using a funding curve, implied volatilities and correlations as inputs.

Where required, a valuation adjustment is made to reflect the unrealized gain or loss at inception of a financial instrument contract where the fair value of that financial instrument is not obtained from a quoted market price or cannot be evidenced by other observable market transactions based on a valuation technique incorporating observable market data.

A bid-offer valuation adjustment is required when a financial instrument is valued at the mid-market price, instead of the bid or offer price for asset or liability positions, respectively. The valuation adjustment takes into account the spread from the mid-market price to either the bid or offer price.

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Some valuation models require parameter calibration from such factors as market observable option prices. The calibration of parameters may be sensitive to factors such as the choice of instruments or optimization methodology. A valuation adjustment is also estimated to mitigate the uncertainties of parameter calibration and model limitations.

In determining fair value, a hierarchy is used which prioritizes the inputs to valuation techniques. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Determination of fair value based on this hierarchy requires the use of observable market data whenever available. Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and model inputs that are either observable, or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 inputs are one or more inputs that are unobservable and significant to the fair value of the asset or liability. Unobservable inputs are used to measure fair value to the extent that observable inputs are not available at the measurement date. The availability of inputs for valuation may affect the selection of valuation techniques. The classification of a financial instrument in the hierarchy for disclosure purposes is based upon the lowest level of input that is significant to the measurement of fair value.

Where observable prices or inputs are not available, management judgment is required to determine fair values by assessing other relevant sources of information such as historical data, proxy information from similar transactions, and through extrapolation and interpolation techniques. For more complex or illiquid instruments, significant judgment is required in the determination of the model used, the selection of model inputs, and in some cases the application of valuation adjustments to the model value or quoted price for inactively traded financial instruments, as the selection of model inputs may be subjective and the inputs may be unobservable. Unobservable inputs are inherently uncertain as there is little or no market data available from which to determine the level at which the transaction would occur under normal business circumstances. Appropriate parameter uncertainty and market risk valuation adjustments for such inputs and other model risk valuation adjustments are assessed in all such instances.

Loans

Loans are debt instruments recognized initially at fair value and are subsequently measured in accordance with the Classification of financial assets policy provided above. The majority of our loans are carried at amortized cost using the effective interest method, which represents the gross carrying amount less allowance for credit losses.

Interest on loans is recognized in Interest income using the effective interest method. The estimated future cash flows used in this calculation include those determined by the contractual term of the asset and all fees that are considered to be integral to the effective interest rate. Also included in this amount are transaction costs and all other premiums or discounts. Fees that relate to activities such as originating, restructuring or renegotiating loans are deferred and recognized as Interest income over the expected term of such loans using the effective interest method. Where there is a reasonable expectation that a loan will be originated, commitment and standby fees are also recognized as interest income over the expected term of the resulting loans using the effective interest method. Otherwise, such fees are recorded as other liabilities and amortized into Non-interest income over the commitment or standby period. Future prepayment fees on mortgage loans are not included as part of the effective interest rate at origination. If prepayment fees are received on a renewal of a mortgage loan before maturity, the fee is included as part of the effective interest rate, and if not renewed, the prepayment fee is recognized in interest income at the prepayment date.

For loans carried at amortized cost or FVOCI, impairment losses are recognized at each balance sheet date in accordance with the three-stage impairment model outlined below.

Allowance for credit losses

An allowance for credit losses (ACL) is established for all financial assets, except for financial assets classified or designated as FVTPL and equity securities designated as FVOCI, which are not subject to impairment assessment. Assets subject to impairment assessment include loans, debt securities, interest-bearing deposits with banks, customers’ liability under acceptances, accounts and accrued interest receivable, and finance and operating lease receivables. ACL on loans measured at amortized cost is presented in Allowance for loan losses. ACL on debt securities measured at FVOCI is presented in Other components of equity. Other financial assets carried at amortized cost are presented net of ACL on our Consolidated Balance Sheets.

Off-balance sheet items subject to impairment assessment include financial guarantees and undrawn loan commitments. ACL on off-balance sheet items is separately calculated and included in Other Liabilities – Provisions.

We measure the ACL on each balance sheet date according to a three-stage expected credit loss impairment model:

•	Performing financial assets
•	Stage 1 – From initial recognition of a financial asset to the date on which the asset has experienced a significant increase in credit risk relative to its initial recognition, a loss allowance is recognized equal to the credit losses expected to result from defaults occurring over the 12 months following the reporting date.
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•	Stage 2 – Following a significant increase in credit risk relative to the initial recognition of the financial asset, a loss allowance is recognized equal to the credit losses expected over the remaining lifetime of the asset.
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•	Impaired financial assets
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•	Stage 3 – When a financial asset is considered to be credit-impaired, a loss allowance is recognized equal to credit losses expected over the remaining lifetime of the asset. Interest income is calculated based on the carrying amount of the asset, net of the loss allowance, rather than on its gross carrying amount.
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Increases or decreases in the required ACL attributable to model changes and new originations, sales or maturities, and changes in risk, parameters and exposures due to changes in loss expectations or stage transfers are recorded in PCL. Write-offs and recoveries of amounts previously written off are recorded against ACL.

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Note 2 Summary of significant accounting policies, estimates and judgments<br><br>(continued)

stages and the application of forward looking information. The underlying assumptions and estimates may result in changes to the provisions from period to period that significantly affect our results of operations.

Measurement of expected credit losses

Expected credit losses are based on a range of possible outcomes and consider all available reasonable and supportable information including internal and external ratings, historical credit loss experience, and expectations about future cash flows. The measurement of expected credit losses is based primarily on the product of the instrument’s PD, loss given default (LGD), and EAD discounted to the reporting date. The main difference between Stage 1 and Stage 2 expected credit losses for performing financial assets is the respective calculation horizon. Stage 1 estimates project PD, LGD and EAD over a maximum period of 12 months while Stage 2 estimates project PD, LGD and EAD over the remaining lifetime of the instrument.

An expected credit loss estimate is produced for each individual exposure. Relevant parameters are modeled on a collective basis using portfolio segmentation that allows for appropriate incorporation of forward looking information. To reflect other characteristics that are not already considered through modelling, expert credit judgment is exercised in determining the final expected credit losses.

For a small percentage of our portfolios which lack detailed historical information and/or loss experience, we apply simplified measurement approaches that may differ from what is described above. These approaches have been designed to maximize the available information that is reliable and supportable for each portfolio and may be collective in nature.

Expected credit losses are discounted to the reporting period date using the effective interest rate.

Expected life

For instruments in Stage 2 or Stage 3, loss allowances reflect expected credit losses over the expected remaining lifetime of the instrument. For most instruments, the expected life is limited to the remaining contractual life.

An exemption is provided for certain instruments with the following characteristics: (a) the instrument includes both a loan and undrawn commitment component; (b) we have the contractual ability to demand repayment and cancel the undrawn commitment; and (c) our exposure to credit losses is not limited to the contractual notice period. For products in scope of this exemption, the expected life may exceed the remaining contractual life and is the period over which our exposure to credit losses is not mitigated by our normal credit risk management actions. This period varies by product and risk category and is estimated based on our historical experience with similar exposures and consideration of credit risk management actions taken as part of our regular credit review cycle. Products in scope of this exemption include credit cards, overdraft balances and certain revolving lines of credit. Judgment is required in determining the instruments in scope for this exemption and estimating the appropriate remaining life based on our historical experience and credit risk mitigation practices.

Assessment of significant increase in credit risk

The assessment of significant increase in credit risk requires significant judgment. Movements between Stage 1 and Stage 2 are based on whether an instrument’s credit risk as at the reporting date has increased significantly relative to the date it was initially recognized. For the purposes of this assessment, credit risk is based on an instrument’s lifetime PD, not the losses we expect to incur. The assessment is generally performed at the instrument level.

Our assessment of significant increases in credit risk is performed at least quarterly based on three factors. If any of the following factors indicates that a significant increase in credit risk has occurred, the instrument is moved from Stage 1 to Stage 2:

(1)	We have established thresholds for significant increases in credit risk based on both a percentage and absolute change in lifetime PD relative to initial recognition. For our wholesale portfolio, a decrease in the borrower’s risk rating is also required to determine that credit risk has increased significantly.
(2)	Additional qualitative reviews are performed to assess the staging results and make adjustments, as necessary, to better reflect the positions whose credit risk has increased significantly.
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(3)	Instruments which are 30 days past due are generally considered to have experienced a significant increase in credit risk, even if our other metrics do not indicate that a significant increase in credit risk has occurred.
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The thresholds for movement between Stage 1 and Stage 2 are symmetrical. After a financial asset has transferred to Stage 2, if its credit risk is no longer considered to have significantly increased relative to its initial recognition, the financial asset will move back to Stage 1.

For certain instruments with low credit risk as at the reporting date, it is presumed that credit risk has not increased significantly relative to initial recognition. Credit risk is considered to be low if the instrument has a low risk of default, and the borrower has the ability to fulfill their contractual obligations both in the near term and in the longer term, including periods of adverse changes in the economic or business environment. Certain interest-bearing deposits with banks, assets purchased under reverse repurchase agreements, insurance policy loans, and liquidity facilities extended to our multi-seller conduits have been identified as having low credit risk.

Use of forward-looking information

The measurement of expected credit losses for each stage and the assessment of significant increase in credit risk considers information about past events and current conditions as well as reasonable and supportable projections of future events and economic conditions. The estimation and application of forward-looking information requires significant judgment.

The PD, LGD and EAD inputs used to estimate Stage 1 and Stage 2 credit loss allowances are modelled based on the macroeconomic variables (or changes in macroeconomic variables) that are most closely correlated with credit losses in the relevant portfolio. Each macroeconomic scenario used in our expected credit loss calculation includes a projection of all relevant macroeconomic variables used in our models for a five year period, subsequently reverting to long-run averages. Macroeconomic variables used in our expected credit loss models include, but are not limited to, unemployment rates, gross domestic product growth rates, equity return indices, commodity prices, and Canadian housing prices. Depending on their usage in the models, macroeconomic variables may be projected at a country, province/state or more granular level.

Our estimation of expected credit losses in Stage 1 and Stage 2 is a discounted probability-weighted estimate that considers a minimum of three future macroeconomic scenarios. Our base case scenario is based on macroeconomic forecasts published

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by our internal economics group. Upside and downside scenarios vary relative to our base case scenario based on reasonably possible alternative macroeconomic conditions. Additional and more severe downside scenarios are designed to capture a broader range of potential credit losses in certain sectors. Scenario design, including the identification of additional downside scenarios, occurs at least on an annual basis and more frequently if conditions warrant.

Scenarios are designed to capture a wide range of possible outcomes and weighted according to our best estimate of the relative likelihood of the range of outcomes that each scenario represents. Scenario weights take into account historical frequency, current trends, and forward-looking conditions and are updated on a quarterly basis. All scenarios considered are applied to all portfolios subject to expected credit losses with the same probabilities.

Our assessment of significant increases in credit risk is based on changes in probability-weighted forward-looking lifetime PDs as at the reporting date, using the same macroeconomic scenarios as the calculation of expected credit losses.

Definition of default

The definition of default used in the measurement of expected credit losses is consistent with the definition of default used for our internal credit risk management purposes. Our definition of default may differ across products and consider both quantitative and qualitative factors, such as the terms of financial covenants and days past due. For retail and wholesale borrowers, except as detailed below, default occurs when the borrower is more than 90 days past due on any material obligation to us, and/or we consider the borrower unlikely to make their payments in full without recourse action on our part, such as taking formal possession of any collateral held. For certain credit card balances, default occurs when payments are 180 days past due. For these balances, the use of a period in excess of 90 days past due is reasonable and supported by observable data on write-off and recovery rates experienced on historical credit card portfolios. The definition of default used is applied consistently from period to period and to all financial instruments unless it can be demonstrated that circumstances have changed such that another definition of default is more appropriate.

Credit-impaired financial assets (Stage 3)

Financial assets are assessed for credit-impairment at each balance sheet date and more frequently when circumstances warrant further assessment. Evidence of credit-impairment may include indications that the borrower is experiencing significant financial difficulty, probability of bankruptcy or other financial reorganization, as well as a measurable decrease in the estimated future cash flows evidenced by the adverse changes in the payments status of the borrower or economic conditions that correlate with defaults.

An asset that is in Stage 3 will move back to Stage 2 when, as at the reporting date, it is no longer considered to be credit-impaired. The asset will transfer back to Stage 1 when its credit risk at the reporting date is no longer considered to have increased significantly from initial recognition, which could occur during the same reporting period as the transfer from Stage 3 to Stage 2.

When a financial asset has been identified as credit-impaired, expected credit losses are measured as the difference between the asset’s gross carrying amount and the present value of estimated future cash flows discounted at the instrument’s original effective interest rate. For impaired financial assets with drawn and undrawn components, expected credit losses also reflect any credit losses related to the portion of the loan commitment that is expected to be drawn down over the remaining life of the instrument.

When a financial asset is credit-impaired, interest ceases to be recognized on the regular accrual basis, which accrues income based on the gross carrying amount of the asset. Rather, interest income is calculated by applying the original effective interest rate to the amortized cost of the asset, which is the gross carrying amount less the related ACL. Following impairment, interest income is recognized on the unwinding of the discount from the initial recognition of impairment.

ACL for credit-impaired loans in Stage 3 are established at the borrower level, where losses related to impaired loans are identified on individually significant loans, or collectively assessed and determined through the use of portfolio-based rates, without reference to particular loans.

Individually assessed loans (Stage 3)

When individually significant loans are identified as impaired, we reduce the carrying value of the loans to their estimated realizable value by recording an individually assessed ACL to cover identified credit losses. The individually assessed ACL reflects the expected amount of principal and interest calculated under the terms of the original loan agreement that will not be recovered, and the impact of time delays in collecting principal and/or interest (time value of money). The estimated realizable value for each individually significant loan is the present value of expected future cash flows discounted using the original effective interest rate for each loan. When the amounts and timing of future cash flows cannot be estimated with reasonable reliability, the estimated realizable amount may be determined using observable market prices for comparable loans, the fair value of collateral underlying the loans, and other reasonable and supported methods based on management judgment.

Individually-assessed allowances are established in consideration of a range of possible outcomes, which may include macroeconomic or non-macroeconomic scenarios, to the extent relevant to the circumstances of the specific borrower being assessed. Assumptions used in estimating expected future cash flows reflect current and expected future economic conditions and are generally consistent with those used in Stage 1 and Stage 2 measurement.

Significant judgment is required in assessing evidence of credit-impairment and estimation of the amount and timing of future cash flows when determining expected credit losses. Changes in the amount expected to be recovered would have a direct impact on PCL and may result in a change in the ACL.

Collectively assessed loans (Stage 3)

Loans that are collectively assessed are grouped on the basis of similar risk characteristics, taking into account loan type, industry, geographic location, collateral type, past due status and other relevant factors.

The collectively-assessed ACL reflects: (i) the expected amount of principal and interest calculated under the terms of the original loan agreement that will not be recovered, and (ii) the impact of time delays in collecting principal and/or interest (time value of money).

The expected principal and interest collection is estimated on a portfolio basis and references historical loss experience of comparable portfolios with similar credit risk characteristics, adjusted for the current environment and expected future conditions. A portfolio specific coverage ratio is applied against the impaired loan balance in determining the collectively-assessed ACL. The time value of money component is calculated by using the discount factors applied to groups of loans sharing

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Note 2 Summary of significant accounting policies, estimates and judgments<br><br>(continued)

common characteristics. The discount factors represent the expected recovery pattern of the comparable group of loans, and reflect the historical experience of these groups adjusted for current and expected future economic conditions and/or industry factors. Significant judgment is required in assessing evidence of impairment and estimation of the amount and timing of future cash flows when determining expected credit losses. Changes in the amount expected to be recovered would have a direct impact on PCL and may result in a change in the ACL.

Write-off of loans

Loans and the related ACL are written off, either partially or in full, when there is no realistic prospect of recovery. Where loans are secured, they are generally written off after receipt of any proceeds from the realization of collateral. In circumstances where the net realizable value of any collateral has been determined and there is no reasonable expectation of further recovery, write off may be earlier. For credit cards, the balances and related ACL are generally written off when payment is 180 days past due. Personal loans are generally written off at 150 days past due.

Modifications

The original terms of a financial asset may be renegotiated or otherwise modified, resulting in changes to the contractual terms of the financial asset that affect the contractual cash flows. The treatment of such modifications is primarily based on the process undertaken to execute the renegotiation and the nature and extent of the expected changes. In the normal course of business, modifications which are performed for credit reasons, primarily related to troubled debt restructurings, are generally treated as modifications of the original financial asset. Modifications which are performed for other than credit reasons are generally considered to be an expiry of the original cash flows; accordingly, such renegotiations are treated as a derecognition of the original financial asset and recognition of a new financial asset.

If a modification of terms does not result in derecognition of the financial asset, the carrying amount of the financial asset is recalculated as the present value of the renegotiated or modified contractual cash flows, discounted at the original effective interest rate and a gain or loss is recognized. The financial asset continues to be subject to the same assessments for significant increase in credit risk relative to initial recognition and credit-impairment, as described above. A modified financial asset will transfer out of Stage 3 if the conditions that led to it being identified as credit-impaired are no longer present and relate objectively to an event occurring after the original credit-impairment was recognized. A modified financial asset will transfer out of Stage 2 when it no longer satisfies the relative thresholds set to identify significant increases in credit risk, which are based on changes in its lifetime PD, days past due and other qualitative considerations. The financial asset continues to be monitored for significant increases in credit risk and credit-impairment.

If a modification of terms results in derecognition of the original financial asset and recognition of the new financial asset, the new financial asset will generally be recorded in Stage 1, unless it is determined to be credit-impaired at the time of the renegotiation. For the purposes of assessing for significant increases in credit risk, the date of initial recognition for the new financial asset is the date of the modification.

Derivatives

When derivatives are embedded in other financial instruments or host contracts, such combinations are known as hybrid instruments. Some of the cash flows of a hybrid instrument vary in a way similar to a stand-alone derivative. If the host contract is a financial asset within the scope of IFRS 9, the classification and measurement criteria are applied to the entire hybrid instrument as described in the Classification of financial assets section of Note 2. If the host contract is a financial liability or an asset that is not within the scope of IFRS 9, embedded derivatives are separately recognized if the economic characteristics and risks of the embedded derivative are not clearly and closely related to the host contract, unless an election has been made to elect the fair value option, as described above. The host contract is accounted for in accordance with the relevant standards.

Derivatives are primarily used in trading activities. Derivatives are also used to manage our exposure to interest, currency, credit and other market risks. The most frequently used derivative products are interest rate and foreign exchange swaps, options, futures and forward rate agreements, equity swaps and credit derivatives. All derivative instruments are recorded on our Consolidated Balance Sheets at fair value.

When derivatives are used in trading activities, the realized and unrealized gains and losses on these derivatives are recognized in Trading revenue in Non-interest income. Derivatives with positive fair values are reported as Derivative assets and derivatives with negative fair values are reported as Derivative liabilities. In accordance with our policy for offsetting financial assets and financial liabilities, the net fair value of certain derivative assets and liabilities are reported as an asset or liability, as appropriate. Valuation adjustments are included in the fair value of Derivative assets and Derivative liabilities. Premiums paid and premiums received are shown in Derivative assets and Derivative liabilities, respectively.

When derivatives are used to manage our own exposures, we determine for each derivative whether hedge accounting can be applied, as discussed in the Hedge accounting section below.

Derecognition of financial assets

Financial assets are derecognized from our Consolidated Balance Sheets when our contractual rights to the cash flows from the assets have expired, when we retain the rights to receive the cash flows of the assets but assume an obligation to pay those cash flows to a third party subject to certain pass-through requirements or when we transfer our contractual rights to receive the cash flows and substantially all of the risk and rewards of the assets have been transferred. When we retain substantially all of the risks and rewards of the transferred assets, the transferred assets are not derecognized from our Consolidated Balance Sheets and are accounted for as secured financing transactions. When we neither retain nor transfer substantially all risks and rewards of ownership of the assets, we derecognize the assets if control over the assets is relinquished. If we retain control over the transferred assets, we continue to recognize the transferred assets to the extent of our continuing involvement.

Management’s judgment is applied in determining whether the contractual rights to the cash flows from the transferred assets have expired or whether we retain the rights to receive cash flows on the assets but assume an obligation to pay for those cash flows. We derecognize transferred financial assets if we transfer substantially all the risks and rewards of the ownership in the assets. When assessing whether we have transferred substantially all of the risk and rewards of the transferred assets, management considers the Bank’s exposure before and after the transfer with the variability in the amount and timing of the net

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cash flows of the transferred assets. In transfers in which we retain the servicing rights, management has applied judgment in assessing the benefits of servicing against market expectations. When the benefits of servicing are greater than fair value, a servicing asset is recognized in Other assets in our Consolidated Balance Sheets. When the benefits of servicing are less than fair value, a servicing liability is recognized in Other liabilities in our Consolidated Balance Sheets.

Derecognition of financial liabilities

We derecognize a financial liability from our Consolidated Balance Sheets when our obligation speci f ied in the contract expires, or is discharged or cancelled. We recognize the difference between the carrying amount of a financial liability transferred and the consideration paid in our Consolidated Statements of Income.

Interest

Interest is recognized in Interest income and Interest expense in the Consolidated Statements of Income for all interest-bearing financial instruments. The effective interest rate is the rate that discounts estimated future cash flows over the expected life of the financial asset or liability to the net carrying amount upon initial recognition. Significant judgment is applied in determining the effective interest rate due to uncertainty in the timing and amounts of future cash flows.

Dividend income

Dividend income is recognized when the right to receive payment is established. This is the ex-dividend date for listed equity securities, and usually the date when shareholders have approved the dividend for unlisted equity securities.

Transaction costs

Transaction costs are expensed as incurred for financial instruments classified or designated as FVTPL. For other financial instruments, transaction costs are capitalized on initial recognition. For financial assets and financial liabilities measured at amortized cost, capitalized transaction costs are amortized through net income over the estimated life of the instrument using the effective interest method. For financial assets measured at FVOCI that do not have fixed or determinable payments and no fixed maturity, capitalized transaction costs are recognized in net income when the asset is derecognized or becomes impaired.

Offsetting financial assets and financial liabilities

Financial assets and financial liabilities are offset on the balance sheet when there exists both a legally enforceable right to offset the recognized amounts and an intention to settle on a net basis, or realize the asset and settle the liability simultaneously.

Assets purchased under reverse repurchase agreements and sold under repurchase agreements

We purchase securities under agreements to resell (reverse repurchase agreements) and take possession of these securities. We monitor the market value of the securities purchased and additional collateral is obtained when appropriate. We have the right to liquidate the collateral held in the event of counterparty default. Reverse repurchase agreements are treated as collateralized lending transactions. We also sell securities under agreements to repurchase (repurchase agreements), which are treated as collateralized borrowing transactions. The securities received under reverse repurchase agreements and securities delivered under repurchase agreements are not recognized on, or derecognized from, our Consolidated Balance Sheets, respectively, unless the risks and rewards of ownership are obtained or relinquished.

Reverse repurchase agreements and repurchase agreements are carried on our Consolidated Balance Sheets at the amounts at which the securities were initially acquired or sold, except when they are classified or designated as FVTPL and are recorded at fair value. Interest earned on reverse repurchase agreements is included in Interest income, and interest incurred on repurchase agreements is included in Interest expense in our Consolidated Statements of Income. Changes in fair value for reverse repurchase agreements and repurchase agreements designated as FVTPL are included in Trading revenue or Other in Non-interest income.

Hedge accounting

We have elected to continue to apply the hedge accounting principles under IAS 39 instead of those under IFRS 9.

We use derivatives and non-derivatives in our hedging strategies to manage our exposure to interest rate, currency, credit and other market risks. Where hedge accounting can be applied, a hedge relationship is designated and documented at inception to detail the particular risk management objective and strategy for undertaking the hedge transaction. The documentation identifies the specific asset, liability or anticipated cash flows being hedged, the risk that is being hedged, the type of hedging instrument used and how effectiveness will be assessed. We assess, both at the inception of the hedge and on an ongoing basis, whether the hedging instruments are ‘highly effective’ in offsetting changes in the fair value or cash flows of the hedged items. A hedge is regarded as highly effective only if the following criteria are met: (i) at inception of the hedge and throughout its life, the hedge is expected to be highly effective in achieving offsetting changes in fair value or cash flows attributable to the hedged risk, and (ii) actual results of the hedge are within a pre-determined range. We perform effectiveness testing to demonstrate that the relationship has been and is expected to be effective over the remaining term of the hedge. In the case of hedging a forecast transaction, the transaction must have a high probability of occurring and must present an exposure to variations in cash flows that could ultimately affect the reported net profit or loss. Hedge accounting is discontinued when it is determined that the hedging instrument is no longer effective as a hedge, the hedging instrument or hedged item is terminated or sold, or the forecast transaction is no longer deemed highly probable. Refer to Note 8 for the fair value of derivatives and non-derivative instruments categorized by their hedging relationships, as well as derivatives that are not designated in hedging relationships.

Until the hedging relationships impacted by the Reform fully transition to ABRs, our prospective effectiveness testing is based on existing hedged cash flows or hedged risks and any ineffectiveness arising from retrospective testing does not result in a discontinuation of the hedge. Additionally, effectiveness testing is applied separately to hedged items referencing IBORs and those referencing ABRs, in accordance with the Amendments. Subsequently, when these relationships fully transition to ABRs, and provided qualifying criteria are met, we will amend the related hedge documentation for the ABR risk, including consequential changes to the description of the hedging instrument(s), the hedged item(s), and the method for assessing hedge effectiveness, without discontinuing the existing hedging relationships.

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Note 2 Summary of significant accounting policies, estimates and judgments<br><br>(continued)

Fair value hedges

In a fair value hedging relationship, the carrying value of the hedged item is adjusted for changes in fair value attributable to the hedged risk and recognized in Non-interest income. Changes in fair value of the hedged item, to the extent that the hedging relationship is effective, are offset by changes in the fair value of the hedging derivative, which are also recognized in Non-interest income. When hedge accounting is discontinued, the carrying value of the hedged item is no longer adjusted and the cumulative fair value adjustments to the carrying value of the hedged items are amortized to Net income over the expected remaining life of the hedged items.

We predominantly use interest rate swaps to hedge our exposure to changes in a fixed interest rate instrument’s fair value caused by changes in interest rates. Until the hedging relationships impacted by the Reform fully transition to ABRs, we apply hedge accounting to IBOR rates which may not be contractually specified when that rate is separately identifiable and reliably measurable at inception of the hedge relationship.

Cash flow hedges

In a cash flow hedging relationship, the effective portion of the change in the fair value of the hedging derivative, net of taxes, is recognized in OCI and reclassified to profit or loss as the associated hedged forecast transaction occurs, while the ineffective portion is recognized in Non-interest income. When hedge accounting is discontinued, the cumulative amounts previously recognized in OCI are reclassified to Net interest income during the periods when the variability in the cash flows of the hedged item affects Net interest income. Unrealized gains and losses on derivatives are reclassified immediately to Net income when the hedged item is sold or terminated early, or when the forecast transaction is no longer expected to occur.

We predominantly use interest rate swaps to hedge the variability in cash flows related to a variable-rate asset or liability. Until the hedging relationships impacted by the Reform fully transition to ABRs, we treat the highly probable hedged IBOR based cash flows of groups of similar assets or liabilities with similar risk characteristics as unchanged as a result of the Reform. In addition, associated cash flow hedge reserves are not recycled into net income solely due to changes related to the transition from IBORs to ABRs. Subsequently, when some items in the group transition to ABRs before other items, the individual hedged items are allocated to subgroups based on the benchmark interest rate being hedged. We test hedge effectiveness based on the defined subgroups, in accordance with the Amendments, if eligibility requirements are met. If a subgroup fails the eligibility requirements, we would discontinue hedge accounting prospectively for the hedging relationship in its entirety.

Net investment hedges

In hedging our foreign currency exposure to a net investment in a foreign operation, the effective portion of foreign exchange gains and losses on the hedging instruments, net of applicable taxes, is recognized in OCI and the ineffective portion is recognized in Non-interest income. The amounts, or a portion thereof, previously recognized in Other components of equity are recognized in Net income on the disposal, or partial disposal, of the foreign operation.

We use foreign exchange contracts and foreign currency-denominated liabilities to manage our foreign currency exposures to net investments in foreign operations having a functional currency other than the Canadian dollar.

Guarantees

Financial guarantee contracts are contracts that contingently require us to make specified payments (in cash, other assets, our own shares or provision of services) to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument. Liabilities are recognized on our Consolidated Balance Sheets at the inception of a guarantee for the fair value of the obligation undertaken in issuing the guarantee. Financial guarantees are subsequently remeasured at the higher of (i) the amount of expected credit losses and (ii) the amount initially recognized less, when appropriate, the cumulative amount of income recognized.

If the financial guarantee contract meets the definition of a derivative, it is measured at fair value at each balance sheet date and reported under Derivatives on our Consolidated Balance Sheets.

Insurance and segregated funds

Premiums from long-duration contracts, primarily life insurance, are recognized when due in Non-interest income – Insurance premiums, investment and fee income. Premiums from short-duration contracts, primarily property and casualty, and fees for administrative services are recognized in Insurance premiums, investment and fee income over the related contract period. Unearned premiums of the short-duration contracts, representing the unexpired portion of premiums, are reported in Other liabilities. Investments made by our insurance operations are classified as FVOCI instruments and amortized cost instruments, except for investments supporting the policy benefit liabilities on life and health insurance contracts and a portion of property and casualty contracts. These are designated as FVTPL with changes in fair value reported in Insurance premiums, investment and fee income.

Insurance claims and policy benefit liabilities represent current claims and estimates for future insurance policy benefits. Liabilities for life insurance contracts are determined using the Canadian Asset Liability Method (CALM), which incorporates assumptions for mortality, morbidity, policy lapses and surrenders, investment yields, policy dividends, operating and policy maintenance expenses and provisions for adverse deviation. These assumptions are reviewed at least annually and updated in response to actual experience and market conditions. Liabilities for property and casualty insurance represent estimated provisions for reported and unreported claims. Liabilities for life and property and casualty insurance are included in Insurance claims and policy benefit liabilities. Changes in Insurance claims and policy benefit liabilities are included in the Insurance policyholder benefits, claims and acquisition expense in our Consolidated Statements of Income in the period in which the estimates change.

Premiums ceded for reinsurance and reinsurance recoveries on policyholder benefits and claims incurred are reported in income and expense as appropriate. Reinsurance recoverables, which relate to paid benefits and unpaid claims, are included in Other assets.

Acquisition costs for new insurance contracts consist of commissions, premium taxes, certain underwriting costs and other costs that vary with the acquisition of new contracts. Deferred acquisition costs for life insurance products are implicitly

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recognized in Insurance claims and policy benefit liabilities by CALM. For property and casualty insurance, these costs are classified as Other assets and amortized over the policy term.

Segregated funds are lines of business in which we issue an insurance contract where the benefit amount is directly linked to the market value of the investments held in the underlying fund. The contractual arrangement is such that the underlying segregated fund assets are registered in our name but the segregated fund policyholders bear the risks and rewards of the funds’ investment performance. Liabilities for these contracts are calculated based on contractual obligations using actuarial assumptions and are at least equivalent to the surrender or transfer value calculated by reference to the value of the relevant underlying funds or indices. Segregated funds’ assets and liabilities are separately presented on our Consolidated Balance Sheets. As the segregated fund policyholders bear the risks and rewards of the funds’ performance, investment income earned by the segregated funds and expenses incurred by the segregated funds are offset and are not separately presented in our Consolidated Statements of Income. Fee income we earn from segregated funds includes management fees, mortality, policy administration and surrender charges, and these fees are recorded in Non-interest income – Insurance premiums, investment and fee income. We provide minimum death benefit and maturity value guarantees on segregated funds. The liability associated with these minimum guarantees is recorded in Insurance claims and policy benefit liabilities.

Liability adequacy tests are performed for all insurance contract portfolios at each balance sheet date to ensure the adequacy of insurance contract liabilities. Current best estimates of future contractual cash flows, claims handling and administration costs, and investment returns from the assets backing the liabilities are taken into account in the tests. When the test results indicate that there is a deficiency in liabilities, the deficiency is charged immediately to our Consolidated Statements of Income by writing down the deferred acquisition costs in Other assets and/or increasing Insurance claims and policy benefit liabilities.

Employee benefits – Pensions and other post-employment benefits

Our defined benefit pension expense, which is included in Non-interest expense – Human resources, consists of the cost of employee pension benefits for the current year’s service, net interest on the net defined benefit liability (asset), past service cost and gains or losses on settlement. Remeasurements of the net defined benefit obligation, which comprise actuarial gains and losses and return on plan assets (excluding amounts included in net interest on the net defined benefit liability), are recognized immediately in OCI in the period in which they occur. Actuarial gains and losses comprise experience adjustments (the effects of differences between the previous actuarial assumptions and what has actually occurred), as well as the effects of changes in actuarial assumptions. Amounts recognized in OCI will not be reclassified subsequently to net income. Past service cost is the change in the present value of the defined benefit obligation resulting from a plan amendment or curtailment and is charged immediately to income.

For each defined benefit pension plan, we recognize the present value of our defined benefit obligations less the fair value of the plan assets as a defined benefit liability reported in Other liabilities – Employee benefit liabilities on our Consolidated Balance Sheets. For plans where there is a net defined benefit asset, the amount is reported as an asset in Other assets –Employee benefit assets on our Consolidated Balance sheets.

The calculation of defined benefit expenses and obligations requires significant judgment as the recognition is dependent on discount rates and various actuarial assumptions such as healthcare cost trend rates, projected salary increases, retirement age and mortality and termination rates. Due to the long-term nature of these plans, such estimates and assumptions are subject to inherent risks and uncertainties. For our pension and other post-employment benefit plans, the discount rate is determined by reference to market yields on high quality corporate bonds. Since the discount rate is based on currently available yields, and involves management’s assessment of market liquidity, it is only a proxy for future yields. Actuarial assumptions, set in accordance with current practices in the respective countries of our plans, may differ from actual experience as country specific statistics are only estimates of future employee behaviour. These assumptions are determined by management and are reviewed by actuaries at least annually. Changes to any of the above assumptions may affect the amounts of benefits obligations, expenses and remeasurements that we recognize.

Our contributions to defined contribution pension plans are expensed when employees have rendered services in exchange for such contributions. Defined contribution pension expense is included in Non-interest expense – Human resources.

Share-based compensation

We offer share-based compensation plans to certain key employees and to our non-employee directors.

To account for stock options granted to employees, compensation expense is recognized over the applicable vesting period with a corresponding increase in equity. Fair value is determined by using option valuation models, which take into account the exercise price of the option, the current share price, the risk free interest rate, the expected volatility of the share price over the life of the option and other relevant factors. When the options are exercised, the exercise price proceeds together with the amount initially recorded in equity are credited to common shares. Our other share-based compensation plans include performance deferred share plans and deferred share unit plans for key employees (the Plans). The obligations for the Plans are accrued over their vesting periods. The Plans are settled in cash.

For cash-settled awards, our accrued obligations are adjusted to their fair value at each balance sheet date. For share-settled awards, our expected obligations recognized in equity are based on the fair value of our common shares at the date of grant. Changes in our obligations, net of related hedges, are recorded as Non-interest expense – Human resources in our Consolidated Statements of Income with a corresponding increase in Other liabilities for cash-settled awards and in Retained earnings for share-settled awards. Compensation expense is recognized in the year the awards are earned by plan participants based on the vesting schedule of the relevant plans, net of estimated forfeitures.

The compensation cost attributable to options and awards granted to employees who are eligible to retire or will become eligible to retire during the vesting period, is recognized immediately if the employee is eligible to retire on the grant date or over the period between the grant date and the date the employee becomes eligible to retire.

Our contributions to the employee savings and share ownership plans are expensed as incurred.

Income taxes

Income tax comprises current tax and deferred tax and is recognized in our Consolidated Statements of Income except to the extent that it relates to items recognized directly in equity, in which case it is recognized in equity.

Current income tax payable on profits is recognized as an expense based on the applicable tax laws in each jurisdiction in the period in which profits arise, calculated using tax rates enacted or substantively enacted by the balance sheet date. Deferred

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Note 2 Summary of significant accounting policies, estimates and judgments<br><br>(continued)

tax is recognized on temporary differences between the carrying amounts of assets and liabilities for accounting and tax purposes. A deferred income tax asset or liability is determined for each temporary difference, except for earnings related to our subsidiaries, branches, associates and interests in joint ventures where the temporary differences will not reverse in the foreseeable future and we have the ability to control the timing of reversal. Deferred tax assets and liabilities are determined based on the tax rates that are expected to be in effect in the period that the asset is realized or the liability is settled, based on tax rates and tax laws that have been enacted or substantively enacted at the balance sheet date. Current tax assets and liabilities are offset when they are levied by the same taxation authority on either the same taxable entity or different taxable entities within the same tax reporting group (which intends to settle on a net basis), and when there is a legal right to offset. Deferred tax assets and liabilities are offset when the same conditions are satisfied. Our Consolidated Statements of Income include items that are non-taxable or non-deductible for income tax purposes and, accordingly, this causes the income tax provision to be different from what it would be if based on statutory rates.

Deferred income taxes accumulated as a result of temporary differences and tax loss carryforwards are included in Other assets and Other liabilities. On a quarterly basis, we review our deferred income tax assets to determine whether it is probable that the benefits associated with these assets will be realized; this review involves evaluating both positive and negative evidence.

We are subject to income tax laws in various jurisdictions where we operate, and the complex tax laws are potentially subject to different interpretations by us and the relevant taxation authorities. Significant judgment is required in the interpretation of the relevant tax laws and in assessing the probability of acceptance of our tax positions to determine our tax provision, which includes our best estimate of uncertain tax positions that are under audit or appeal by the relevant tax authorities. We perform a review on a quarterly basis to incorporate our best assessment based on information available, but additional liability and income tax expense could result based on the acceptance of our tax positions by the relevant tax authorities.

The determination of our deferred tax asset or liability also requires significant management judgment as the recognition is dependent on our projection of future taxable profits and tax rates that are expected to be in effect in the period the asset is realized or the liability is settled. Any changes in our projection will result in changes in deferred tax assets or liabilities on our Consolidated Balance Sheets, and also deferred tax expense on our Consolidated Statements of Income.

Business combinations, goodwill and other intangibles

All business combinations are accounted for using the acquisition method. Non-controlling interests, if any, are recognized at their proportionate share of the fair value of identifiable assets and liabilities, unless otherwise indicated. Identifiable intangible assets are recognized separately from goodwill and included in Other intangibles. Goodwill represents the excess of the price paid for the business acquired over the fair value of the net identifiable assets acquired on the date of acquisition.

Goodwill

Goodwill is allocated to cash-generating units or groups of cash-generating units for the purpose of impairment testing, which is undertaken at the lowest level at which goodwill is monitored for internal management purposes. Impairment testing is performed annually as at August 1, or more frequently if there are objective indicators of impairment, by comparing the recoverable amount of a cash-generating unit (CGU) with its carrying amount. The recoverable amount of a CGU is the higher of its value in use (VIU) and its fair value less costs of disposal (FVLCD). VIU is the present value of the expected future cash flows from a CGU. FVLCD is the amount obtainable from the sale of a CGU in an orderly transaction between market participants, less disposal costs. The fair value of a CGU is estimated using valuation techniques such as a discounted cash flow method, adjusted to reflect the considerations of a prospective third-party buyer. External evidence such as binding sale agreements or recent transactions for similar businesses within the same industry is considered to the extent that it is available.

Significant judgment is involved in estimating the model inputs used to determine the recoverable amount of our CGUs, in particular future cash flows, discount rates and terminal growth rates, due to the uncertainty in the timing and amount of cash flows and the forward-looking nature of these inputs. Future cash flows are based on financial plans agreed by management which are estimated based on forecast results, business initiatives, planned capital investments and returns to shareholders. Discount rates are based on the bank-wide cost of capital, adjusted for CGU-specific risks and currency exposure as reflected by differences in expected inflation. Bank-wide cost of capital is based on the Capital Asset Pricing Model. CGU-specific risks include country risk, business/operational risk, geographic risk (including political risk, devaluation risk, and government regulation), currency risk, and price risk (including product pricing risk and inflation). Terminal growth rates are based on the long-term steady state growth expectations in the countries within which the CGU operates. If the future cash flows and other assumptions in future periods deviate significantly from the current amounts used in our impairment testing, the value of our goodwill could become impaired, with any such impairment loss recognized in Non-interest expense.

The carrying amount of a CGU includes the carrying amount of assets, liabilities and goodwill allocated to the CGU. If the recoverable amount is less than the carrying value, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the CGU and then to the other non-financial assets of the CGU proportionately based on the carrying amount of each asset. Any impairment loss is charged to income in the period in which the impairment is identified. Goodwill is stated at cost less accumulated impairment losses. Subsequent reversals of goodwill impairment are prohibited.

Upon disposal of a portion of a CGU, the carrying amount of goodwill related to the portion of the CGU sold is included in the determination of gains or losses on disposal. The carrying amount is determined based on the relative fair value of the disposed portion to the total CGU.

Other intangibles

Intangible assets represent identifiable non-monetary assets and are acquired either separately or through a business combination, or generated internally. Intangible assets acquired through a business combination are recognized separately from goodwill when they are separable or arise from contractual or other legal rights, and their fair value can be measured reliably. The cost of a separately acquired intangible asset includes its purchase price and directly attributable costs of preparing the asset for its intended use. In respect of internally generated intangible assets, cost includes all directly attributable costs necessary to create, produce, and prepare the asset to be capable of operating in the manner intended by management. Research and development costs that are not eligible for capitalization are expensed. After initial recognition, an intangible asset

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is carried at its cost less any accumulated amortization and accumulated impairment losses, if any. Intangible assets with a finite-life are amortized on a straight-line basis over their estimated useful lives as follows: computer software – 3 to 10 years; and customer relationships – 10 to 20 years. We do not have any intangible assets with indefinite lives.

Intangible assets are assessed for indicators of impairment at each reporting period. If there is an indication that an intangible asset may be impaired, an impairment test is performed by comparing the carrying amount of the intangible asset to its recoverable amount. Where it is not possible to estimate the recoverable amount of an individual asset, we estimate the recoverable amount of the CGU to which the asset belongs. If the recoverable amount of the asset (or CGU) is less than its carrying amount, the carrying amount of the intangible asset is written down to its recoverable amount as an impairment loss.

An impairment loss recognized previously is reversed if there is a change in the estimates used to determine the recoverable amount of the asset (or CGU) since the last impairment loss was recognized. If an impairment loss is subsequently reversed, the carrying amount of the asset (or CGU) is revised to the lower of its recoverable amount and the carrying amount that would have been determined (net of amortization) had there been no prior impairment.

Due to the subjective nature of these estimates, significant judgment is required in determining the useful lives and recoverable amounts of our intangible assets, and assessing whether certain events or circumstances constitute objective evidence of impairment. Estimates of the recoverable amounts of our intangible assets rely on certain key inputs, including future cash flows and discount rates. Future cash flows are based on sales projections and allocated costs which are estimated based on forecast results and business initiatives. Discount rates are based on the bank-wide cost of capital, adjusted for asset-specific risks. Changes in these assumptions may impact the amount of impairment loss recognized in Non-interest expense.

Other

Translation of foreign currencies

Monetary assets and liabilities denominated in foreign currencies are translated into Canadian dollars at rates prevailing at the balance sheet date. Foreign exchange gains and losses resulting from the translation and settlement of these items are recognized in Non-interest income in the Consolidated Statements of Income.

Non-monetary assets and liabilities that are measured at historical cost are translated into Canadian dollars at historical rates.

Assets and liabilities of our foreign operations with functional currencies other than Canadian dollars are translated into Canadian dollars at rates prevailing at the balance sheet date, and income and expenses of these foreign operations are translated at average rates of exchange for the reporting period.

Unrealized gains or losses arising as a result of the translation of our foreign operations along with the effective portion of related hedges are reported in Other components of equity on an after-tax basis. Upon disposal or partial disposal of a foreign operation, an appropriate portion of the accumulated net translation gains or losses is included in Non-interest income.

Premises and equipment

Premises and equipment includes land, buildings, leasehold improvements, computer equipment, furniture, fixtures and other equipment, and are stated at cost less accumulated depreciation, except for land which is not depreciated, and accumulated impairment losses. Cost comprises the purchase price, any costs directly attributable to bringing the asset to the location and condition necessary for its intended use, and the initial estimate of any disposal costs. Depreciation is recorded principally on a straight–line basis over the estimated useful lives of the assets, which are 25 to 50 years for buildings, 3 to 10 years for computer equipment, and 5 to 10 years for furniture, fixtures and other equipment. The amortization period for leasehold improvements is the lesser of the useful life of the leasehold improvements or the lease term plus the first renewal period, if reasonably assured of renewal, up to a maximum of 10 years. Depreciation methods, useful lives, and residual values are reassessed at each reporting period and adjusted as appropriate. Gains and losses on disposal are recorded in Non–interest income.

Premises and equipment are assessed for indicators of impairment at each reporting period. If there is an indication that an asset may be impaired, an impairment test is performed by comparing the asset’s carrying amount to its recoverable amount.

After the recognition of impairment, the depreciation charge is adjusted in future periods to reflect the asset’s revised carrying amount. If an impairment is later reversed, the carrying amount of the asset is revised to the lower of the asset’s recoverable amount and the carrying amount that would have been determined (net of depreciation) had there been no prior impairment loss. The depreciation charge in future periods is adjusted to reflect the revised carrying amount.

Right-of-use assets are also included in premises and equipment.

Leasing

At inception of a contract, we assess whether a contract is or contains a lease. A contract is, or contains, a lease if the contract conveys the right to obtain substantially all of the economic benefits from, and direct the use of, an identified asset for a period of time in return for consideration.

When we are the lessee in a lease arrangement, we initially record a right-of-use asset and corresponding lease liability, except for short-term leases and leases of low-value assets. Short-term leases are leases with a lease term of 12 months or less. Low-value assets are unspecialized, common, technologically unsophisticated, widely available, and widely used non-infrastructure assets. For short-term leases and leases of low-value assets, we record the lease payments as an operating expense on a straight-line basis over the lease term.

Where we are reasonably certain to exercise extension and termination options, they are included in the lease term.

The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted at our incremental borrowing rate. The lease liability is subsequently measured at amortized cost using the effective interest method, recorded in Interest expense.

The right-of-use asset is initially measured based on the initial amount of the lease liability, adjusted for lease payments made on or before the commencement date, initial direct costs incurred, and an estimate of costs to dismantle, remove, or restore the asset, less any lease incentives received. Costs related to dismantling and removing leasehold improvements are capitalized as part of the leasehold improvement asset (rather than the right-of-use asset of the lease) when the leasehold improvements are separately capitalized.

The right-of-use asset is depreciated to the earlier of the lease term and the useful life, unless ownership will transfer to RBC or we are reasonably certain to exercise a purchase option, in which case the useful life of the right-of-use asset is used. We apply IAS 36 Impairment of assets to determine whether a right-of-use asset is impaired and account for any identified impairment loss as described in the premises and equipment accounting policies above.

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Note 2 Summary of significant accounting policies, estimates and judgments<br><br>(continued)

Provisions

We are required to estimate the results of ongoing legal proceedings, and expenses to be incurred to dispose of capital assets. The forward-looking nature of these estimates requires us to use a significant amount of judgment in projecting the timing and amount of future cash flows. We record our provisions on the basis of all available information at the end of the reporting period and make adjustments on a quarterly basis to reflect current expectations. It may not be possible to predict the resolution of these matters or the timing of their ultimate resolution. Should actual results differ from our expectations, we may incur expenses in excess of the provisions recognized. Where appropriate, we apply judgment in limiting the extent of our provisions-related disclosures as not to prejudice our positions in matters of dispute.

When some or all of the economic benefits required to settle a provision are expected to be recovered f r om a third party, such as an insurer, a separate asset is recognized if it is virtually certain that reimbursement will be received.

Commissions and fees

Commissions and fees primarily relate to Investment management and custodial fees, Mutual fund revenue, Securities brokerage commissions, Services charges, Underwriting and other advisory fees, Card service revenue and Credit fees, and are recognized based on the applicable service contracts with customers.

Investment management and custodial fees and Mutual fund revenue are generally calculated as a percentage of daily or period-end net asset values (NAV) based on the terms of the contract with customers and are received monthly, quarterly, semiannually or annually, depending on the terms of the contract. Investment management and custodial fees are generally derived from assets under management (AUM) when our clients solicit the investment capabilities of an investment manager or from assets under administration (AUA) where the investment strategy is directed by the client or a designated third-party manager. Mutual fund revenue is derived from the daily NAV of the mutual funds. Investment management and custodial fees and Mutual fund revenue are recognized over time when the service is provided to the customer, provided that it is highly probable that a significant reversal in the amount of revenue recognized will not occur.

Commissions earned on Securities brokerage services and Service charges that are related to the provision of specific transaction-type services are recognized when the service is fulfilled. Where services are provided over time, revenue is recognized as the services are provided.

Underwriting and other advisory fees primarily relate to underwriting of new issuances of debt or equity and various advisory services. Underwriting fees are generally expressed as a percentage of the funds raised through issuance and are recognized when the service has been completed. Advisory fees vary depending on the scope and type of engagement and can be fixed in nature or contingent on a future event. Advisory fees are recognized over the period in which the service is provided and are recognized only to the extent that it is highly probable that a significant reversal in the amount of revenue will not occur.

Card service revenue primarily includes interchange revenue and annual card fees. Interchange revenue is calculated as a fixed percentage of the transaction amount and recognized when the card transaction is settled. Annual card fees are fixed fees and are recognized over a 12 month period.

Credit fees are primarily earned for arranging syndicated loans and making credit available on undrawn facilities. The timing of the recognition of credit fees varies based on the nature of the services provided.

When service fees and other costs are incurred in relation to commissions and fees earned, we record these costs on a gross basis in either Non-interest expense – Other or Non-interest expense – Human resources based on our assessment of whether we have primary responsibility to fulfill the contract with the customer and have discretion in establishing the price for the commissions and fees earned, which may require judgment.

Earnings per share

Earnings per share is computed by dividing Net income available to common shareholders by the weighted average number of common shares outstanding for the period. Net income available to common shareholders is determined after deducting dividend entitlements of preferred shareholders and distributions on other equity instruments, any gains (losses) on redemption of preferred shares and other equity instruments net of related income taxes and the net income attributable to non-controlling interests.

Diluted earnings per share reflects the potential dilution that could occur if additional common shares are assumed to be issued under securities or contracts that entitle their holders to obtain common shares in the future, to the extent such entitlement is not subject to unresolved contingencies. For contracts that may be settled in cash or in common shares at our option, diluted earnings per share is calculated based on the assumption that such contracts will be settled in shares. Income and expenses associated with these types of contracts are excluded from the Net income available to common shareholders, and the additional number of shares that would be issued is included in the diluted earnings per share calculation. This included certain convertible shares with the conversion assumed to have taken place at the beginning of the period or on the date of issue, if later. For stock options whose exercise price is less than the average market price of our common shares, using the treasury stock method, they are assumed to be exercised and the proceeds are used to repurchase common shares at the average market price for the period. The incremental number of common shares issued under stock options and repurchased from proceeds is included in the calculation of diluted earnings per share.

Share capital and other equity instruments

We classify a financial instrument that we issue as a financial asset, financial liability or an equity instrument in accordance with the substance of the contractual arrangement.

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Our common shares held by us are classified as treasury shares in equity and accounted for at weighted average cost. Upon the sale of treasury shares, the difference between the sale proceeds and the cost of the shares is recognized in Retained earnings. Financial instruments issued by us are classified as equity instruments when there is no contractual obligation to transfer cash or other financial assets. Incremental costs directly attributable to the issue of equity instruments are included in equity as a deduction from the proceeds, net of tax. Financial instruments that will be settled by a variable number of our common shares upon their conversion by the holders as well as the related accrued distributions are classified as liabilities on our Consolidated Balance Sheets. Dividends and yield distributions on these instruments are classified as Interest expense in our Consolidated Statements of Income. For compound instruments comprised of both liability and equity components, the liability component is initially measured at fair value with any residual amount assigned to the equity component.

Future changes in accounting policy and disclosure

The following standards have been issued, but are not yet effective for us.

IFRS 17

Insurance Contracts

(IFRS 17)

Note 3 Fair value of financial instruments

Carrying value and fair value of financial instruments

The following tables provide a comparison of the carrying and fair values for each classification of financial instruments. Embedded derivatives are presented on a combined basis with the host contracts. For measurement purposes, they are carried at fair value when conditions requiring separation are met.

	As at October 31, 2021
	Carrying value and fair value								Carrying value		Fair value
(Millions of Canadian dollars)	Financial<br> instruments<br> classified as<br> FVTPL		Financial<br> instruments<br> designated as<br> FVTPL		Financial<br> instruments<br> classified as<br> FVOCI		Financial<br> instruments<br> designated as<br> FVOCI		Financial<br> instruments<br> measured at<br> amortized cost		Financial<br> instruments<br> measured at<br> amortized cost		Total<br> carrying<br> amount		Total<br> fair value
Financial assets
Interest-bearing deposits with banks	$	–	$	56,896	$	–	$	–	$	22,742	$	22,742	$	79,638	$	79,638
Securities
Trading		125,801		13,439		–		–		–		–		139,240		139,240
Investment, net of applicable allowance		–		–		77,802		533		67,149		66,823		145,484		145,158
		125,801		13,439		77,802		533		67,149		66,823		284,724		284,398
Assets purchased under reverse repurchase agreements and securities borrowed		265,011		–		–		–		42,892		42,892		307,903		307,903
Loans, net of applicable allowance
Retail		–		241		327		–		500,621		502,277		501,189		502,845
Wholesale		8,428		2,769		813		–		204,376		204,683		216,386		216,693
		8,428		3,010		1,140		—		704,997		706,960		717,575		719,538
Other
Derivatives		95,541		–		–		–		–		–		95,541		95,541
Other assets <br>(1)		4,109		–		–		–		58,483		58,483		62,592		62,592
Financial liabilities
Deposits
Personal	$	321	$	18,328					$	343,839	$	344,040	$	362,488	$	362,689
Business and government <br>(2)		739		131,630						563,984		565,106		696,353		697,475
Bank <br>(3)		–		17,251						24,739		24,743		41,990		41,994
		1,060		167,209						932,562		933,889		1,100,831		1,102,158
Other
Obligations related to securities sold short		37,841		–						–		–		37,841		37,841
Obligations related to assets sold under repurchase agreements and securities loaned		–		236,147						26,054		26,054		262,201		262,201
Derivatives		91,439		–						–		–		91,439		91,439
Other liabilities <br>(4)		654		171						64,746		64,749		65,571		65,574
Subordinated debentures		–		–						9,593		9,601		9,593		9,601

Consolidated Financial Statements Royal Bank of Canada: Annual Report 2021 153

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Note 3 Fair value of financial instruments<br><br><br><br>(continued)

	As at October 31, 2020
	Carrying value and fair value								Carrying value		Fair value
(Millions of Canadian dollars)	Financial<br> instruments<br> classified as<br> FVTPL		Financial<br> instruments<br> designated as<br> FVTPL		Financial<br> instruments<br> classified as<br> FVOCI		Financial<br> instruments<br> designated as<br> FVOCI		Financial<br> instruments<br> measured at<br> amortized cost		Financial<br> instruments<br> measured at<br> amortized cost		Total<br> carrying<br> amount		Total<br> fair value
Financial assets
Interest-bearing deposits with banks	$	–	$	21,603	$	–	$	–	$	17,410	$	17,410	$	39,013	$	39,013
Securities
Trading		126,027		10,044		–		–		–		–		136,071		136,071
Investment, net of applicable allowance		–		–		81,395		525		57,823		58,627		139,743		140,547
		126,027		10,044		81,395		525		57,823		58,627		275,814		276,618
Assets purchased under reverse repurchase agreements and securities borrowed		264,394		–		–		–		48,621		48,621		313,015		313,015
Loans, net of applicable allowance
Retail		–		253		260		–		454,429		462,884		454,942		463,397
Wholesale		6,197		2,363		744		–		196,746		198,753		206,050		208,057
		6,197		2,616		1,004		–		651,175		661,637		660,992		671,454
Other
Derivatives		113,488		–		–		–		–		–		113,488		113,488
Other assets <br>(1)		3,414		–		–		–		57,065		57,065		60,479		60,479
Financial liabilities
Deposits
Personal	$	104	$	17,096					$	325,852	$	324,804	$	343,052	$	342,004
Business and government <br>(2)		389		107,466						516,456		518,501		624,311		626,356
Bank <br>(3)		–		18,015						26,507		26,518		44,522		44,533
		493		142,577						868,815		869,823		1,011,885		1,012,893
Other
Obligations related to securities sold short		29,285		–						–		–		29,285		29,285
Obligations related to assets sold under repurchase agreements and securities loaned		–		255,922						18,309		18,309		274,231		274,231
Derivatives		109,927		–						–		–		109,927		109,927
Other liabilities <br>(4)		80		86						65,712		65,719		65,878		65,885
Subordinated debentures		–		–						9,867		10,071		9,867		10,071
(1)	Includes Customers’ liability under acceptances and financial instruments recognized in Other assets.
---	---
(2)	Business and government deposits include deposits from regulated deposit-taking institutions other than banks.
---	---
(3)	Bank deposits refer to deposits from regulated banks and central banks.
---	---
(4)	Includes Acceptances and financial instruments recognized in Other liabilities.
---	---

Financial assets designated as fair value through profit or loss

For our financial assets designated as FVTPL, we measure the change in fair value attributable to changes in credit risk as the difference between the total change in the fair value of the instrument during the period and the change in fair value calculated using the appropriate risk-free yield curves. For the year ended October 31, 2021, the change in fair value during the period attributable to changes in credit risk for positions still held was a gain of $613 million and the cumulative change in fair value attributable to changes in credit risk for positions still held was a gain of $173 million. For the year ended October 31, 2020 the change in fair value during the period attributable to changes in credit risk for positions still held was a loss of $379 million and the cumulative change in fair value attributable to changes in credit risk for positions still held was a loss of $442 million. As at October 31, 2021, the extent to which credit derivatives or similar instruments mitigate the maximum exposure to credit risk was $484 million (October 31, 2020 – $520 million).

Financial liabilities designated as fair value through profit or loss

For our financial liabilities designated as FVTPL, we take into account changes in our own credit spread and the expected duration of the instrument to measure the change in fair value attributable to changes in credit risk.

	As at or for the year ended October 31, 2021<br>(1)
	Contractual<br> maturity<br> <br>amount		Carrying value		Difference<br> between<br> carrying value<br> and contractual<br> <br>maturity amount			Changes in fair value attributable<br> to changes in credit risk included<br> in OCI for positions still held
(Millions of Canadian dollars)				During the period					Cumulative<br>(2)
Term deposits
Personal	$	18,205	$	18,328	$	123		$	(17	)	$	72
Business and government <br>(3)		131,830		131,630		(200	)		(75	)		416
Bank <br>(4)		17,253		17,251		(2	)		–			–
		167,288		167,209		(79	)		(92	)		488
Obligations related to assets sold under repurchase agreements and securities loaned		236,164		236,147		(17	)		(8	)		–
Other liabilities		171		171		–			–			–
	$	403,623	$	403,527	$	(96	)	$	(100	)	$	488

154 Royal Bank of Canada: Annual Report 2021 Consolidated Financial Statements

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	As at or for the year ended October 31, 2020 (1)
	Contractual<br> maturity<br> <br>amount		Carrying value		Difference<br> between<br> carrying value<br> and contractual<br> <br>maturity amount			Changes in fair value attributable<br> to changes in credit risk included<br> in OCI for positions still held
(Millions of Canadian dollars)				During the period					Cumulative (2)
Term deposits
Personal	$	17,279	$	17,096	$	(183	)	$	67	$	89
Business and government <br>(3)		106,153		107,466		1,313			281		491
Bank <br>(4)		18,016		18,015		(1	)		–		–
		141,448		142,577		1,129			348		580
Obligations related to assets sold under repurchase agreements and securities loaned		255,908		255,922		14			8		8
Other liabilities		86		86		–			–		–
	$	397,442	$	398,585	$	1,143		$	356	$	588
(1)	There are no significant changes in fair value attributable to changes in credit risk included in net income for positions still held.
---	---
(2)	The cumulative change is measured from the initial designation of the liabilities as FVTPL. For the year ended October 31, 2021, $25 <br>million of fair value losses previously included in OCI relate to financial liabilities derecognized during the year (October 31, 2020 –<br>$2 million of fair value gains).
---	---
(3)	Business and government term deposits include amounts from regulated deposit-taking institutions other than regulated banks.
---	---
(4)	Bank term deposits refer to amounts from regulated banks and central banks.
---	---

Net gains (losses) from financial instruments classified and designated as fair value through profit or loss

Financial instruments classified as FVTPL, which includes mainly trading securities, derivatives, trading liabilities, and financial assets and liabilities designated as FVTPL are measured at fair value with realized and unrealized gains and losses recognized in Non-interest income.

	For the year ended
(Millions of Canadian dollars)	October 31<br> 2021			October 31<br> 2020
Net gains (losses)<br><br>(1)
Classified as fair value through profit or loss <br>(2)	$	3,447		$	(69	)
Designated as fair value through profit or loss <br>(3)		(1,407	)		1,533
	$	2,040		$	1,464
By product line<br><br>(1)
Interest rate and credit <br>(4)	$	1,033		$	1,490
Equities		57			(501	)
Foreign exchange and commodities		950			475
	$	2,040		$	1,464
(1)	Excludes the following amounts related to our insurance operations and included in Insurance premiums, investment and fee income in the Consolidated Statements of Income: Net <br>losses<br>from financial instruments designated as FVTPL of $14 million (October 31, 2020 – gains of $329 million).
---	---
(2)	Excludes derivatives designated in a hedging relationship. Refer to Note 8 for net gains (losses) on these derivatives.
---	---
(3)	For the year ended October 31, 2021, $1,408 million of net fair value<br>losses<br>on financial liabilities designated as FVTPL, other than those attributable to changes in our own credit risk, were included in <br>Non-interest<br> income (October 31, 2020 – gains of $1,532 million).
---	---
(4)	Includes gains (losses) recognized on cross currency interest rate swaps.
---	---

Net interest income from financial instruments

Interest and dividend income arising from financial assets and financial liabilities and the associated costs of funding are reported in Net interest income.

	For the year ended
(Millions of Canadian dollars)	October 31<br> 2021		October 31<br> 2020
Interest and dividend income<br><br>(1), (2)
Financial instruments measured at fair value through profit or loss	$	4,551	$	8,480
Financial instruments measured at fair value through other comprehensive income		375		957
Financial instruments measured at amortized cost		23,219		25,446
		28,145		34,883
Interest expense<br><br>(1)
Financial instruments measured at fair value through profit or loss	$	2,865	$	6,065
Financial instruments measured at amortized cost <br>(3)		5,278		7,983
		8,143		14,048
Net interest income	$	20,002	$	20,835
(1)	Excludes the following amounts related to our insurance operations and included in Insurance premiums, investment and fee income in the Consolidated Statements of Income: Interest income of $576 million (October 31, 2020 – $521 million), and Interest expense of $4 million (October 31, 2020 – $7 million).
---	---
(2)	Includes dividend income for the year ended October 31, 2021 of $2,436 million (October 31, 2020 – $2,670 million), which is presented in Interest and dividend income in the Consolidated Statements of Income.
---	---
(3)	Includes interest expense on lease liabilities for the year ended October 31, 2021 of $110 million (October 31, 2020 – $123 million)<br>.
---	---

Consolidated Financial Statements Royal Bank of Canada: Annual Report 2021 155

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Note 3 Fair value of financial instruments<br><br><br><br>(continued)

Fee income arising from financial instruments

For the year ended October 31, 2021, we earned $5,583 million in fees from banking services (October 31, 2020 – $5,134 million). For the year ended October 31, 2021, we also earned $15,167 million in fees from investment management, trust, custodial, underwriting, brokerage and other similar fiduciary services to retail and institutional clients (October 31, 2020 – $13,166 million). These fees are included in Non-interest income.

Fair value of assets and liabilities measured at fair value on a recurring basis and classified using the fair value hierarchy

	As at
	October 31, 2021														October 31, 2020
	Fair value<br> <br>measurements using								Netting adjustments		Fair value				Fair value<br> <br>measurements using										Netting adjustments		Fair value
(Millions of Canadian dollars)		Level 1		Level 2			Level 3							Level 1			Level 2				Level 3
Financial assets
Interest-bearing deposits with banks	$	–	$	56,896		$	–				$	56,896			$	–		$	21,603			$	–				$	21,603
Securities
Trading
Debt issued or guaranteed by:
Canadian government (1)
Federal		8,977		2,380			–					11,357				12,773			3,012				–					15,785
Provincial and municipal		–		11,068			–					11,068				–			11,562				–					11,562
U.S. federal, state, municipal and agencies (1)		215		22,738			25					22,978				1,508			35,029				44					36,581
Other OECD government (2)		2,729		5,730			–					8,459				3,085			3,380				–					6,465
Mortgage-backed securities (1)		–		4			–					4				–			39				–					39
Asset-backed securities
Non-CDO<br> securities (3)		–		891			2					893				–			526				2					528
Corporate debt and other debt		–		23,085			25					23,110				–			21,464				30					21,494
Equities		56,826		3,015			1,530					61,371				39,795			2,561				1,261					43,617
		68,747		68,911			1,582					139,240				57,161			77,573				1,337					136,071
Investment
Debt issued or guaranteed by:
Canadian government (1)
Federal		1,973		1,730			–					3,703				647			1,894				–					2,541
Provincial and municipal		–		3,132			–					3,132				–			3,233				–					3,233
U.S. federal, state, municipal and agencies (1)		12		34,815			–					34,827				160			38,364				–					38,524
Other OECD government		–		5,956			–					5,956				–			7,345				–					7,345
Mortgage-backed securities (1)		–		2,727			20					2,747				–			2,343				27					2,370
Asset-backed securities
CDO		–		7,074			–					7,074				–			7,414				–					7,414
Non-CDO<br> securities		–		586			–					586				–			854				–					854
Corporate debt and other debt		–		19,625			152					19,777				–			18,954				160					19,114
Equities		46		153			334					533				38			152				335					525
		2,031		75,798			506					78,335				845			80,553				522					81,920
Assets purchased under reverse repurchase agreements and<br> securities borrowed		–		265,011			–					265,011				–			264,394				–					264,394
Loans		–		11,501			1,077					12,578				–			8,747				1,070					9,817
Other
Derivatives
Interest rate contracts		–		33,857			320					34,177				1			53,720				501					54,222
Foreign exchange contracts		–		41,224			74					41,298				–			39,246				57					39,303
Credit derivatives		–		34			–					34				–			463				–					463
Other contracts		3,175		17,955			26					21,156				4,458			16,767				36					21,261
Valuation adjustments		–		(819	)		9					(810	)			–			(1,112	)			8					(1,104	)
Total gross derivatives		3,175		92,251			429					95,855				4,459			109,084				602					114,145
Netting adjustments										)		(314	)													)		(657	)
Total derivatives												95,541																113,488
Other assets		1,474		2,635			–					4,109				1,154			2,207				53					3,414
	$	75,427	$	573,003		$	3,594			)	$	651,710			$	63,619		$	564,161			$	3,584			)	$	630,707
Financial liabilities
Deposits
Personal	$	–	$	18,498		$	151				$	18,649			$	–		$	17,061			$	139				$	17,200
Business and government		–		132,369			–					132,369				–			107,855				–					107,855
Bank		–		17,251			–					17,251				–			18,015				–					18,015
Other
Obligations related to securities sold short		18,345		19,496			–					37,841				12,484			16,801				–					29,285
Obligations related to assets sold under repurchase agreements and securities loaned		–		236,147			–					236,147				–			255,922				–					255,922
Derivatives
Interest rate contracts		–		28,566			955					29,521				–			46,723				1,089					47,812
Foreign exchange contracts		–		40,484			27					40,511				–			38,210				35					38,245
Credit derivatives		–		120			–					120				–			531				–					531
Other contracts		3,699		17,456			419					21,574				5,734			18,041				337					24,112
Valuation adjustments		–		38			(11	)				27				–			(84	)			(32	)				(116	)
Total gross derivatives		3,699		86,664			1,390					91,753				5,734			103,421				1,429					110,584
Netting adjustments										)		(314	)													)		(657	)
Total derivatives												91,439																109,927
Other liabilities		258		560			7					825				118			10				38					166
	$	22,302	$	510,985		$	1,548			)	$	534,521			$	18,336		$	519,085			$	1,606			)	$	538,370

All values are in US Dollars.

(1)	As at October 31, 2021, residential and commercial mortgage-backed securities (MBS) included in all fair value levels of trading securities were $13,124 <br>million<br>and $nil (October 31, 2020 – $20,520 million and $nil), respectively, and in all fair value levels of Investment securities were $13,542 <br>million<br>and $2,592 <br>million<br>(October 31, 2020 – $9,487 million and $2,137 million), respectively.
(2)	Organisation for Economic <br>Co-operation<br> and Development (OECD).
---	---
(3)	Collateralized debt obligations (CDO).
---	---

156 Royal Bank of Canada: Annual Report 2021 Consolidated Financial Statements

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Fair values of our significant assets and liabilities measured on a recurring basis are determined and classified in the fair value hierarchy table using the following valuation techniques and inputs.

Interest-bearing deposits with banks

The majority of our Interest-bearing deposits with banks are designated as FVTPL. These FVTPL deposits are composed of short-dated deposits placed with banks, and are included in Interest-bearing deposits with banks in the fair value hierarchy table. The fair values of these instruments are determined using the discounted cash flow method. The inputs to the valuation models include interest rate swap curves and credit spreads, where applicable. They are classified as Level 2 instruments in the hierarchy as the inputs are observable.

Government bonds (Canadian, U.S. and other OECD governments)

Government bonds are included in Canadian government debt, U.S. federal, state, municipal and agencies debt, Other OECD government debt and Obligations related to securities sold short in the fair value hierarchy table. The fair values of government issued or guaranteed debt securities in active markets are determined by reference to recent transaction prices, broker quotes, or third-party vendor prices and are classified as Level 1 in the hierarchy. The fair values of securities that are not traded in active markets are based on either security prices, or valuation techniques using implied yields and risk spreads derived from prices of actively traded and similar government securities. Securities with observable prices or rate inputs as compared to transaction prices, dealer quotes or vendor prices are classified as Level 2 in the hierarchy. Securities where inputs are unobservable are classified as Level 3 in the hierarchy.

Corporate and U.S. municipal bonds

The fair values of corporate and U.S. municipal bonds, which are included in Corporate debt and other debt, U.S. federal, state, municipal and agencies debt and Obligations related to securities sold short in the fair value hierarchy table, are determined using either recently executed transaction prices, broker quotes, pricing services, or in certain instances, the discounted cash flow method using rate inputs such as benchmark yields (CDOR, LIBOR and other similar reference rates) and risk spreads of comparable securities. Securities with observable prices or rate inputs are classified as Level 2 in the hierarchy. Securities where inputs are unobservable are classified as Level 3 in the hierarchy.

Asset-backed securities and Mortgage-backed securities

Asset-backed securities (ABS) and MBS are included in Asset-backed securities, Mortgage-backed securities, Canadian government debt, U.S. federal, state, municipal and agencies debt, and Obligations related to securities sold short in the fair value hierarchy table. Inputs for valuation of ABS and MBS are, when available, traded prices, dealer or lead manager quotes, broker quotes and vendor prices of the identical securities. When prices of the identical securities are not readily available, we use industry standard models with inputs such as discount margins, yields, default, prepayment and loss severity rates that are implied from transaction prices, dealer quotes or vendor prices of comparable instruments. Where security prices and inputs are observable, ABS and MBS are classified as Level 2 in the hierarchy. Otherwise, they are classified as Level 3 in the hierarchy.

Equities

Equities consist of listed and unlisted common shares, private equities, mutual funds and hedge funds with certain redemption restrictions and are included in equities and obligations for securities sold short. The fair values of common shares are based on quoted prices in active markets, where available, and are classified as Level 1 in the hierarchy. Where quoted prices in active markets are not readily available, fair value is determined based on quoted market prices for similar securities or through valuation techniques, such as multiples of earnings and the discounted cash flow method with forecasted cash flows and discount rate as inputs. Private equities are classified as Level 3 in the hierarchy as their inputs are not observable. Hedge funds are valued using Net Asset Values (NAV). If we can redeem a hedge fund at NAV prior to the next quarter end, the fund is classified as Level 2 in the hierarchy. Otherwise, it is classified as Level 3 in the hierarchy.

Loans

Loans include base metal loans, corporate loans, banker acceptances and asset-backed financing loans. Fair values are determined based on market prices, if available, or discounted cash flow method using the following inputs: market interest rates, base metal commodity prices, market based spreads of assets with similar credit ratings and terms to maturity, LGD, expected default frequency implied from credit derivative prices, if available, and relevant pricing information such as contractual rate, origination and maturity dates, redemption price, coupon payment frequency and day count convention. Loans with market prices or observable inputs are classified as Level 2 in the hierarchy and loans with unobservable inputs that have significant impacts on the fair values are classified as Level 3 in the hierarchy.

Derivatives

The fair values of exchange-traded derivatives, such as interest rate and equity options and futures, are based on quoted market prices and are typically classified as Level 1 in the hierarchy. OTC derivatives primarily consist of interest rate contracts, foreign exchange contracts and credit derivatives. The exchange-traded or OTC interest rate, foreign exchange and equity derivatives are included in Interest rate contracts, Foreign exchange contracts and Other contracts, respectively, in the fair value hierarchy table. The fair values of OTC derivatives are determined using valuation models when quoted market prices or third-party consensus pricing information are not available. The valuation models, such as discounted cash flow method or Black-Scholes option model, incorporate observable or unobservable inputs for interest and foreign exchange rates, equity and commodity prices (including indices), credit spreads, corresponding market volatility levels, and other market-based pricing factors. Other adjustments to fair value include bid-offer, CVA, FVA, OIS, parameter and model uncertainties, and unrealized gain or loss at inception of a transaction. A derivative instrument is classified as Level 2 in the hierarchy if observable market inputs are available or the unobservable inputs are not significant to the fair value. Otherwise, it is classified as Level 3 in the hierarchy.

Securities borrowed or purchased under resale agreements and securities loaned or sold under repurchase agreements

In the fair value hierarchy table, these instruments are included in Assets purchased und e r reverse repurchase agreements and securities borrowed, and Obligations related to assets sold under repurchase agreements and securities loaned. The fair values

Consolidated Financial Statements Royal Bank of Canada: Annual Report 2021 157

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Note 3 Fair value of financial instruments<br><br><br><br>(continued)

of these contracts are determined using valuation techniques such as the discounted cash flow method using interest rate curves as inputs. They are classified as Level 2 instruments in the hierarchy as the inputs are observable.

Deposits

A majority of our deposits are measured at amortized cost but certain deposits are designated as FVTPL. These FVTPL deposits include deposits taken from clients, issuances of certificates of deposits and promissory notes, and interest rate and equity linked notes. The fair values of these instruments are determined using the discounted cash flow method and derivative option valuation models. The inputs to the valuation models include benchmark yield curves, credit spreads, interest rates, equity and interest rate volatility, dividends and correlation, where applicable. They are classified as Level 2 or 3 instruments in the hierarchy, depending on the significance of the unobservable credit spreads, volatility, dividend and correlation rates.

Quantitative information about fair value measurements using significant unobservable inputs (Level 3 Instruments)

The following table presents fair values of our significant Level 3 financial instruments, valuation techniques used to determine their fair values, ranges and weighted averages of unobservable inputs.

As at October 31, 2021 (Millions of Canadian dollars, except for prices, percentages and ratios)
		Fair value						Range of input values<br>(1), (2)
Products	Reporting line in the fair value<br> hierarchy table	Assets		Liabilities		Valuation<br> techniques	Significant<br> unobservable<br> inputs (3)	Low		High		Weighted<br> average /<br> <br>Inputs<br> distribution
Corporate debt and related derivatives						Price-based	Prices	$	29.18	$	127.09	$	96.36
	Corporate debt and other debt	$	27			Discounted cash flows	Credit spread		1.15%		6.92%		4.04%
	Loans		1,077				Credit enhancement		11.92%		15.90%		13.25%
	Derivative related liabilities			$	9
Government debt and municipal bonds						Price-based	Prices		n.a.		n.a.		n.a.
	Corporate debt and other debt		150			Discounted cash flows	Yields		3.91%		8.17%		5.91%
Private equities, hedge fund investments and related equity derivatives						Market comparable	EV/EBITDA multiples		8.82X		26.00X		9.16X
	Equities		1,864			Price-based	P/E multiples		9.40X		38.00X		10.96X
	Derivative related liabilities				2	Discounted cash flows	EV/Rev multiples		1.14X		20.80X		5.40X
							Liquidity discounts (4)		10.00%		40.00%		16.40%
							Discount rate		10.65%		10.65%		10.65%
							NAV / prices (5)		n.a.		n.a.		n.a.
Interest rate derivatives and interest-rate-linked structured notes (6), (7)						Discounted cash flows	Interest rates		0.13%		2.46%		High
	Derivative related assets		367			Option pricing model	CPI swap rates		1.76%		2.42%		Even
	Derivative related liabilities				974		IR-IR<br> correlations		19.00%		67.00%		Even
							FX-IR<br> correlations		29.00%		56.00%		Even
							FX-FX<br> correlations		68.00%		68.00%		Even
Equity derivatives and equity-linked structured notes (6), (7)						Discounted cash flows	Dividend yields		0.00%		6.37%		Lower
	Derivative related assets		25			Option pricing model	Equity <br>(EQ)-EQ<br> correlations		32.00%		95.00%		Middle
	Deposits				151		EQ-FX<br> correlations		(60.60)%		27.30%		Middle
	Derivative related liabilities				381		EQ volatilities		8.00%		128.00%		Upper
Other (8)
	Asset-backed securities		2
	Derivative related assets		37
	Other assets		–
	Mortgage-backed securities		20
	U.S. state, municipal and agencies debt		25
	Derivative related liabilities				24
	Other liabilities				7
Total		$	3,594	$	1,548

158 Royal Bank of Canada: Annual Report 2021 Consolidated Financial Statements

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As at October 31, 2020 (Millions of Canadian dollars, except for prices, percentages and ratios)
		Fair value						Range of input values (1), (2)
Products	Reporting line in the fair value<br> hierarchy table	Assets		Liabilities		Valuation<br> techniques	Significant<br> unobservable<br> inputs (3)	Low		High		Weighted<br> average /<br> <br>Inputs<br> distribution
Corporate debt and related derivatives						Price-based	Prices	$	1.33	$	136.34	$	94.23
	Corporate debt and other debt	$	33			Discounted cash flows	Credit spread		1.75%		14.10%		7.93%
	Loans		1,070				Credit enhancement		11.82%		15.75%		13.13%
	Derivative related liabilities			$	25
Government debt and municipal bonds						Price-based	Prices	$	64.62	$	64.62	$	64.62
	Corporate debt and other debt		157			Discounted cash flows	Yields		4.21%		7.89%		5.88%
Private equities, hedge fund investments and related equity derivatives						Market comparable	EV/EBITDA multiples		7.00X		15.38X		13.31X
	Equities		1,596			Price-based	P/E multiples		9.40X		33.47X		19.10X
	Derivative related liabilities				10	Discounted cash flows	EV/Rev multiples		1.61X		9.10X		2.04X
							Liquidity discounts (4)		10.00%		40.00%		16.40%
							Discount rate		10.52%		10.52%		10.52%
							NAV / prices (5)		n.a.		n.a.		n.a.
Interest rate derivatives and interest-rate-linked structured notes (6), (7)						Discounted cash flows	Interest rates		1.20%		1.60%		Even
	Derivative related assets		540			Option pricing model	CPI swap rates		1.46%		1.83%		Even
	Derivative related liabilities				1,103		IR-IR<br> correlations		19.00%		67.00%		Even
							FX-IR<br> correlations		29.00%		56.00%		Even
							FX-FX<br> correlations		68.00%		68.00%		Even
Equity derivatives and equity-linked structured notes (6), (7)						Discounted cash flows	Dividend yields		0.00%		11.38%		Lower
	Derivative related assets		36			Option pricing model	Equity (EQ)-EQ correlations		21.90%		97.00%		Middle
	Deposits				139		EQ-FX<br> correlations		(71.40)%		45.10%		Middle
	Derivative related liabilities				238		EQ volatilities		9.00%		176.00%		Upper
Other (8)
	Asset-backed securities		2
	Derivative related assets		26
	Other assets		53
	Mortgage-backed securities		27
	U.S. state, municipal and agencies debt		44
	Derivative related liabilities				53
	Other liabilities				38
Total		$	3,584	$	1,606
(1)	The low and high input values represent the actual highest and lowest level inputs used to value a group of financial instruments in a particular product category. These input ranges do not reflect the level of input uncertainty, but are affected by the different underlying instruments within the product category. The input ranges will therefore vary from period to period based on the characteristics of the underlying instruments held at each balance sheet date. Where provided, the weighted average of the input values is calculated based on the relative fair values of the instruments within the product category. The weighted averages for derivatives are not presented in the table as they would not provide a comparable metric; instead, distribution of significant unobservable inputs within the range for each product category is indicated in the table.
---	---
(2)	Price-based inputs are significant for certain debt securities and are based on external benchmarks, comparable proxy instruments or <br>pre-quarter-end<br> trade data. For these instruments, the price input is expressed in dollars for each $100 par value. For example, with an input price of $105, an instrument is valued at a premium over its par value.
---	---
(3)	The significant unobservable inputs include<br> the following: (i) Enterprise Value (EV); (ii) Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA); (iii) Price / Earnings (P/E); (iv) Revenue (Rev); (v) Consumer Price Index (CPI); (vi) Interest Rate (IR); (vii) Foreign Exchange (FX); and (viii) Equity (EQ).
---	---
(4)	Fair value of securities with liquidity discount inputs totalled $385 million (October 31, 2020 – $286 million).
---	---
(5)	NAV of a hedge fund is total fair value of assets less liabilities divided by the number of fund units. Private equities are valued based on NAV or valuation techniques. The range for NAV per unit or price per share has not been disclosed for the hedge funds or private equities due to the dispersion of prices given the diverse nature of the investments.
---	---
(6)	The level of aggregation and diversity within each derivative instrument category may result in certain ranges of inputs being wide and inputs being unevenly distributed across the range. In the table, we indicated whether the majority of the inputs are concentrated toward the upper, middle, or lower end of the range, or evenly distributed throughout the range.
---	---
(7)	The structured notes contain embedded equity or interest rate derivatives with unobservable inputs that are similar to those of the equity or interest rate derivatives.
---	---
(8)	Other primarily includes certain insignificant instruments such as auction rate securities, commodity derivatives, foreign exchange derivatives, contingent considerations, bank-owned life insurance and retractable shares.
---	---
n.a.	not applicable
---	---

Sensitivity to unobservable inputs and interrelationships between unobservable inputs

Yield, credit spreads/discount margins

A financial instrument’s yield is the interest rate used to discount future cash flows in a valuation model. An increase in the yield, in isolation, would result in a decrease in a fair value measurement and vice versa. A credit spread/discount margin is the difference between a debt instrument’s yield and a benchmark instrument’s yield. Benchmark instruments have high credit quality ratings, similar maturities and are often government bonds. The credit spread/discount margin therefore represents the discount rate used to determine the present value of future cash flows of an asset to reflect the market return required for uncertainty in the estimated cash flows. The credit spread/discount margin for an instrument forms part of the yield used in a discounted cash flow method.

Funding spread

Funding spreads are credit spreads specific to funding or deposit rates. A decrease in funding spreads, on its own, will increase the fair value of our liabilities, and vice versa.

Consolidated Financial Statements Royal Bank of Canada: Annual Report 2021 159

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Note 3 Fair value of financial instruments<br><br><br><br>(continued)

Default rates

A default rate is the rate at which borrowers fail to make scheduled loan payments. A decrease in the default rate will typically increase the fair value of the loan, and vice versa. This effect will be significantly more pronounced for a non-government guaranteed loan than a government guaranteed loan.

Prepayment rates

A prepayment rate is the rate at which a loan will be repaid in advance of its expected amortization schedule. Prepayments change the future cash flows of a loan. An increase in the prepayment rate in isolation will result in an increase in fair value when the loan interest rate is lower than the current reinvestment rate, and a decrease in the prepayment rate in isolation will result in a decrease in fair value when the loan interest rate is lower than the current reinvestment rate. Prepayment rates are generally negatively correlated with interest rates.

Recovery and loss severity rates

A recovery rate is an estimation of the amount that can be collected in a loan default scenario. The recovery rate is the recovered amount divided by the loan balance due, expressed as a percentage. The inverse concept of recovery is loss severity. Loss severity rate is an estimation of the loan amount not collected when a loan defaults. The loss severity rate is the loss amount divided by the loan balance due, expressed as a percentage. Generally, an increase in the recovery rate or a decrease in the loss severity rate will increase the loan fair value, and vice versa.

Volatility rates

Volatility measures the potential variability of future prices and is often measured as the standard deviation of price movements. Volatility is an input to option pricing models used to value derivatives and issued structured notes. Volatility is used in valuing equity, interest rate, commodity and foreign exchange options. A higher volatility rate means that the underlying price or rate movements are more likely to occur. Higher volatility rates may increase or decrease an option’s fair value depending on the option’s terms. The determination of volatility rates is dependent on various factors, including but not limited to, the underlying’s market price, the strike price and maturity.

Dividend yields

A dividend yield is the underlying equity’s expected dividends expressed as an annual percentage of its price. Dividend yield is used as an input for forward equity price and option models. Higher dividend yields will decrease the forward price, and vice versa. A higher dividend yield will increase or decrease an option’s value, depending on the option’s terms.

Correlation rates

Correlation is the linear relationship between the movements in two different variables. Correlation is an input to the valuation of derivative contracts and issued structured notes when an instrument’s payout is determined by correlated variables. When variables are positively correlated, an increase in one variable will result in an increase in the other variable. When variables are negatively correlated, an increase in one variable will result in a decrease in the other variable. The referenced variables can be within a single asset class or market (equity, interest rate, commodities, credit and foreign exchange) or between variables in different asset classes (equity to foreign exchange, or interest rate to foreign exchange). Changes in correlation will either increase or decrease a financial instrument’s fair value depending on the terms of the instrument.

Interest rates

An interest rate is the percentage amount charged on a principal or notional amount. Increasing interest rates will decrease the discounted cash flow value of a financial instrument, and vice versa.

Consumer Price Index swap rates

A CPI swap rate is expressed as a percentage of an increase in the average price of a basket of consumer goods and services, such as transportation, food and medical care. An increase in the CPI swap rate will cause inflation swap payments to be larger, and vice versa.

EV/EBITDA multiples, P/E multiples, EV/Rev multiples, and liquidity discounts

Private equity valuation inputs include EV/EBITDA multiples, P/E multiples and EV/Rev multiples. These are used to calculate either enterprise value or share value of a company based on a multiple of earnings or revenue estimates. Higher multiples equate to higher fair values for all multiple types, and vice versa. A liquidity discount may be applied when few or no transactions exist to support the valuations.

Credit Enhancement

Credit enhancement is an input to the valuation of securitized transactions and is the amount of loan loss protection for a senior tranche. Credit enhancement is expressed as a percentage of the transaction sizes. An increase in credit enhancement will cause the credit spread to decrease and the tranche fair value to increase, and vice versa.

Interrelationships between unobservable inputs

Unobservable inputs, including the above discount margin, default rate, prepayment rate, and recovery and loss severity rates, may not be independent of each other. For example, the discount margin can be affected by a change in default rate, prepayment rate, or recovery and loss severity rates. Discount margins will generally decrease when default rates decline or when recovery rates increase.

160 Royal Bank of Canada: Annual Report 2021 Consolidated Financial Statements

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Changes in fair value measurement for instruments measured on a recurring basis and categorized in Level 3

	For the year ended October 31, 2021
(Millions of Canadian dollars)	Fair value<br> at beginning<br> of period			Gains<br> <br>(losses)<br> included in<br> earnings			Gains<br> <br>(losses)<br> included<br> in OCI<br>(1)			Purchases<br> (issuances)			Settlement<br> (sales) and<br> other<br>(2)			Transfers<br> into<br> Level 3			Transfers<br> out of<br> Level 3			Fair value<br> at end of<br> period			Gains<br> (losses) included<br> in earnings for<br> positions still held
Assets
Securities
Trading
Debt issued or guaranteed by:
U.S. state, municipal and agencies	$	44		$	–		$	(2	)	$	–		$	(17	)	$	–		$	–		$	25		$	1
Asset-backed securities
Non-CDO<br> securities		2			–			–			–			–			–			–			2			–
Corporate debt and other debt		30			(2	)		–			12			(5	)		14			(24	)		25			(1	)
Equities		1,261			96			(60	)		338			(125	)		26			(6	)		1,530			164
		1,337			94			(62	)		350			(147	)		40			(30	)		1,582			164
Investment
Mortgage-backed securities		27			–			(7	)		–			–			–			–			20			n.a.
Corporate debt and other debt		160			–			(12	)		–			4			–			–			152			n.a.
Equities		335			–			34			5			(2	)		–			(38	)		334			n.a.
		522			–			15			5			2			–			(38	)		506			n.a.
Loans		1,070			(5	)		(19	)		264			(8	)		73			(298	)		1,077			30
Other
Net derivative balances <br>(3)
Interest rate contracts		(588	)		84			(1	)		5			(109	)		(4	)		(22	)		(635	)		84
Foreign exchange contracts		22			14			–			38			(25	)		7			(9	)		47			1
Other contracts		(301	)		(20	)		11			(142	)		102			(276	)		233			(393	)		(10	)
Valuation adjustments		40			–			–			6			(26	)		–			–			20			–
Other assets		53			(39	)		(2	)		–			(12	)		–			–			–			–
	$	2,155		$	128		$	(58	)	$	526		$	(223	)	$	(160	)	$	(164	)	$	2,204		$	269
Liabilities
Deposits	$	(139	)	$	(66	)	$	5		$	(191	)	$	51		$	(154	)	$	343		$	(151	)	$	6
Other
Other liabilities		(38	)		22			1			–			8			–			–			(7	)		23
	$	(177	)	$	(44	)	$	6		$	(191	)	$	59		$	(154	)	$	343		$	(158	)	$	29
	For the year ended October 31, 2020
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
(Millions of Canadian dollars)	Fair value<br> at beginning<br> of period			Gains<br> <br>(losses)<br> included in<br> earnings			Gains<br> <br>(losses)<br> included<br> in OCI (1)			Purchases<br> (issuances)			Settlement<br> (sales) and<br> other (2)			Transfers<br> into<br> Level 3			Transfers<br> out of<br> Level 3			Fair value<br> at end of<br> period			Gains<br> (losses) included<br> in earnings for<br> positions still held
Assets
Securities
Trading
Debt issued or guaranteed by:
U.S. state, municipal and agencies	$	58		$	–		$	1		$	–		$	(15	)	$	–		$	–		$	44		$	–
Asset-backed securities
Non-CDO<br> securities		2			–			–			–			–			–			–			2			–
Corporate debt and other debt		21			(1	)		–			1			(3	)		12			–			30			–
Equities		1,219			(126	)		10			231			(74	)		3			(2	)		1,261			(47	)
		1,300			(127	)		11			232			(92	)		15			(2	)		1,337			(47	)
Investment
Mortgage-backed securities		27			–			–			–			–			–			–			27			n.a.
Corporate debt and other debt		153			–			4			–			3			–			–			160			n.a.
Equities		294			–			37			8			(4	)		–			–			335			n.a.
		474			–			41			8			(1	)		–			–			522			n.a.
Loans		680			92			8			551			(706	)		624			(179	)		1,070			(15	)
Other
Net derivative balances <br>(3)
Interest rate contracts		(585	)		(116	)		(2	)		(31	)		4			35			107			(588	)		(57	)
Foreign exchange contracts		21			(7	)		(3	)		23			–			(6	)		(6	)		22			(13	)
Other contracts		(195	)		(76	)		(1	)		(174	)		44			(88	)		189			(301	)		(8	)
Valuation adjustments		22			–			–			–			18			–			–			40			–
Other assets		77			(7	)		2			–			(19	)		–			–			53			(7	)
	$	1,794		$	(241	)	$	56		$	609		$	(752	)	$	580		$	109		$	2,155		$	(147	)
Liabilities
Deposits	$	(156	)	$	52		$	(3	)	$	(296	)	$	30		$	(113	)	$	347		$	(139	)	$	29
Other
Other liabilities		(60	)		5			(1	)		4			14			–			–			(38	)		5
	$	(216	)	$	57		$	(4	)	$	(292	)	$	44		$	(113	)	$	347		$	(177	)	$	34
(1)	These amounts include the foreign currency translation gains or losses arising on consolidation of foreign subsidiaries relating to the Level 3 instruments, where applicable. The unrealized gains on Investment securities recognized in OCI were $46 million for the year ended October 31, 2021 (October 31, 2020 – gains of $32 million) excluding the translation gains or losses arising on consolidation.
---	---
(2)	Other includes amortization of premiums or discounts recognized in net income.
---	---
(3)	Net derivatives as at October 31, 2021 included derivative assets of $429 <br>million<br>(October 31, 2020 – $602 million) and derivative liabilities of $1,390 <br>million<br>(October 31, 2020 – $1,429 million).
---	---
n.a.	not applicable
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Consolidated Financial Statements Royal Bank of Canada: Annual Report 2021 161

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Note 3 Fair value of financial instruments<br><br><br><br>(continued)

Transfers between fair value hierarchy levels for instruments carried at fair value on a recurring basis

Transfers between Level 1 and Level 2, and transfers into and out of Level 3 are assumed to occur at the end of the period. For an asset or a liability that transfers into Level 3 during the period, the entire change in fair value for the period is excluded from the Gains (losses) included in earnings for positions still held column of the above reconciliation, whereas for transfers out of Level 3 during the period, the entire change in fair value for the period is included in the same column of the above reconciliation.

Transfers between Level 1 and 2 are dependent on whether fair value is obtained on the basis of quoted market prices in active markets (Level 1).

During the year ended October 31, 2021, transfers out of Level 1 to Level 2 included Obligations related to securities sold short of $498 million. During the year ended October 31, 2020, transfers out of Level 1 to Level 2 included Investment U.S. federal, state, municipal and agencies debt of $1,200 million, Trading U.S. federal , state, municipal and agencies debt of $1,125 million and Obligations related to securities sold s hort of $804 million.

During the year ended October 31, 2021, transfers out of Level 2 to Level 1 included Obligations related to securities sold short of

$130 million. During the year ended October 31, 2020, transfers out of Level 2 to Level 1 included Investment U.S. fed eral, state, municipal and agencies debt of $937 million.

Transfers between Level 2 and Level 3 are primarily due to either a change in the market observability for an input, or a change in an unobservable input’s significance to a financial instrument’s fair value.

During the year ended October 31, 2021, significant transfers out of Level 2 to Level 3 included:

•	$277 million of OTC equity options in Other contracts comprised of $17 million of derivative related assets and $294 million of derivative related liabilities, due to changes in the market observability of inputs and changes in the significance of unobservable inputs.
•	$154 million of Personal deposits, due to changes in the significance of unobservable inputs.
---	---

During the year ended October 31, 2020, significant transfers out of Level 2 to Level 3 included:

•	$624 million of Loans, due to changes in the significance of unobservable inputs.
•	$69 million of OTC equity options in Other contracts comprised of $51 million of derivative related assets and $120 million of derivative related liabilities, due to changes in the market observability of inputs.
---	---
•	$113 million of Personal deposits, due to changes in the significance of unobservable inputs.
---	---

During the year ended October 31, 2021, significant transfers out of Level 3 to Level 2 included:

•	$298 million of Loans, due to changes in the significance of unobservable inputs.
•	$245 million of OTC equity options in Other contracts comprised of $69 million of derivative related assets and $314 million of derivative related liabilities, due to changes in the market observability of inputs and changes in the significance of unobservable inputs.
---	---
•	$343 million of Personal deposits, due to changes in the significance of unobservable inputs.
---	---

During the year ended October 31, 2020, significant transfers out of Level 3 to Level 2 included:

•	$179 million of Loans, due to changes in significance of unobservable inputs.
•	$107 million of Interest rate contracts comprised of $211 million of derivative related assets and $318 million of derivative related liabilities, due to changes in the market observability of inputs.
---	---
•	$109 million of OTC equity options in Other contracts comprised of $76 million of derivative related assets and $185 million of derivative related liabilities, due to changes in the market observability of inputs.
---	---
•	$347 million of Personal deposits, due to changes in the significance of unobservable inputs.
---	---

Positive and negative fair value movements of Level 3 financial instruments from using reasonably possible alternative assumptions

A financial instrument is classified as Level 3 in the fair value hierarchy if one or more of its unobservable inputs may significantly affect the measurement of its fair value. In preparing the financial statements, appropriate levels for these unobservable input parameters are chosen so that they are consistent with prevailing market evidence or management judgment. Due to the unobservable nature of the prices or rates, there may be uncertainty about the valuation of these Level 3 financial instruments.

162 Royal Bank of Canada: Annual Report 2021 Consolidated Financial Statements

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The following table summarizes the impacts to fair values of Level 3 financial instruments using reasonably possible alternative assumptions. This sensitivity disclosure is intended to illustrate the potential impact of the relative uncertainty in the fair value of Level 3 financial instruments. In reporting the sensitivities below, we offset balances in instances where: (i) the move in valuation factors cause an offsetting positive and negative fair value movement, (ii) both offsetting instruments are in Level 3, and (iii) exposures are managed and reported on a net basis. With respect to overall sensitivity, it is unlikely in practice that all reasonably possible alternative assumptions would simultaneously be realized.

	As at
	October 31, 2021								October 31, 2020
(Millions of Canadian dollars)	Level 3<br> fair value			Positive fair value<br> movement from<br> using reasonably<br> possible<br> alternatives		Negative fair value<br> movement from<br> using reasonably<br><br>possible<br><br>alternatives			Level 3<br> fair value			Positive fair value<br> movement from<br> using reasonably<br> possible<br> alternatives		Negative fair value<br> movement from<br> using reasonably<br> possible<br><br>alternatives
Securities
Trading
Debt issued or guaranteed by:
U.S. state, municipal and agencies	$	25		$	–	$	(1	)	$	44		$	1	$	(1	)
Asset-backed securities		2			–		–			2			–		–
Corporate debt and other debt		25			1		(1	)		30			1		(1	)
Equities		1,530			19		(16	)		1,261			15		(15	)
Investment
Mortgage-backed securities		20			4		(4	)		27			3		(3	)
Corporate debt and other debt		152			14		(13	)		160			18		(16	)
Equities		334			33		(34	)		335			28		(28	)
Loans		1,077			23		(24	)		1,070			49		(49	)
Derivatives		429			7		(5	)		602			2		(2	)
Other assets		–			–		–			53			–		–
	$	3,594		$	101	$	(98	)	$	3,584		$	117	$	(115	)
Deposits	$	(151	)	$	–	$	–		$	(139	)	$	4	$	(4	)
Derivatives		(1,390	)		30		(77	)		(1,429	)		13		(55	)
Other
Other liabilities		(7	)		–		–			(38	)		–		–
	$	(1,548	)	$	30	$	(77	)	$	(1,606	)	$	17	$	(59	)

Sensitivity results

As at October 31, 2021, the effects of applying other reasonably possible alternative assumptions to the L e vel 3 asset positions would be an increase of $101 million and a reduction of $98 million in fair value, of which $51 million and $51 million would be recorded in Other components of equity, respectively. The effects of applying these assumptions to the Level 3 liability positions would result in a decrease of $30 million and an increase of $77 million in fair value.

Level 3 valuation inputs and approaches to developing reasonably possible alternative assumptions

The following is a summary of the unobservable inputs used in the valuation of the Level 3 instruments and our approaches to developing reasonably possible alternative assumptions used to determine sensitivity.

Financial assets or<br> liabilities	Sensitivity methodology
Asset-backed securities, corporate debt, government debt, municipal bonds and loans	Sensitivities are determined based on adjusting, plus or minus one standard deviation, the <br>bid-offer<br> spreads or input prices if a sufficient number of prices is received, adjusting input parameters such as credit spreads or using high and low vendor prices as reasonably possible alternative assumptions.
Private equities, hedge fund investments and related equity derivatives	Sensitivity of direct private equity investments is determined by (i) adjusting the discount rate by 2% when the discounted cash flow method is used to determine fair value, (ii) adjusting the price multiples based on the range of multiples of comparable companies when price-multiples-based models are used, or (iii) using an alternative valuation approach. The private equity fund, hedge fund and related equity derivative NAVs are provided by the fund managers, and as a result, there are no other reasonably possible alternative assumptions for these investments.
Interest rate derivatives	Sensitivities of interest rate and cross currency swaps are derived using plus or minus one standard deviation of the inputs, and an amount representing model and parameter uncertainty, where applicable.
Equity derivatives	Sensitivity of the Level 3 position is determined by shifting the unobservable model inputs by plus or minus one standard deviation of the pricing service market data including volatility, dividends or correlations, as applicable.
Bank funding and deposits	Sensitivities of deposits are calculated by shifting the funding curve by plus or minus certain basis points.
Structured notes	Sensitivities for interest-rate-linked and equity-linked structured notes are derived by adjusting inputs by plus or minus one standard deviation, and for other deposits, by estimating a reasonable move in the funding curve by plus or minus certain basis points.

Consolidated Financial Statements Royal Bank of Canada: Annual Report 2021 163

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Note 3 Fair value of financial instruments<br><br><br><br>(continued)

Fair value for financial instruments that are carried at amortized cost and classified using the fair value hierarchy

	As at October 31, 2021
	Fair value<br> approximates<br> carrying value<br><br>(1)			Fair value may not approximate carrying value
			Fair value measurements using												Total<br><br>fair value
(Millions of Canadian dollars)			Level 1			Level 2			Level 3			Total
Interest-bearing deposits with banks	$	22,742		$	–		$	–		$	–		$	–		$	22,742
Amortized cost securities <br>(2)		–			1,025			65,798			–			66,823			66,823
Assets purchased under reverse repurchase agreements and securities borrowed		31,368			–			11,524			–			11,524			42,892
Loans
Retail		68,377			–			429,672			4,228			433,900			502,277
Wholesale		16,228			–			184,055			4,400			188,455			204,683
		84,605			–			613,727			8,628			622,355			706,960
Other assets		57,859			–			489			135			624			58,483
		196,574			1,025			691,538			8,763			701,326			897,900
Deposits
Personal		272,675			–			70,908			457			71,365			344,040
Business and government		418,185			–			146,334			587			146,921			565,106
Bank		16,943			–			7,792			8			7,800			24,743
		707,803			–			225,034			1,052			226,086			933,889
Obligations related to assets sold under repurchase agreements and securities loaned		26,054			–			–			–			–			26,054
Other liabilities		55,495			–			1,256			7,998			9,254			64,749
Subordinated debentures		–			–			9,545			56			9,601			9,601
	$	789,352		$	–		$	235,835		$	9,106		$	244,941		$	1,034,293
	As at October 31, 2020
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
	Fair value<br> approximates<br> carrying value <br>(1)			Fair value may not approximate carrying value
			Fair value measurements using												Total<br> fair value
(Millions of Canadian dollars)			Level 1			Level 2			Level 3			Total
Interest-bearing deposits with banks	$	17,410		$	–		$	–		$	–		$	–		$	17,410
Amortized cost securities <br>(2)		–			502			58,125			–			58,627			58,627
Assets purchased under reverse repurchase agreements and securities borrowed		37,064			–			11,557			–			11,557			48,621
Loans
Retail		66,151			–			392,093			4,640			396,733			462,884
Wholesale		11,278			–			182,094			5,381			187,475			198,753
		77,429			–			574,187			10,021			584,208			661,637
Other assets		56,484			–			450			131			581			57,065
		188,387			502			644,319			10,152			654,973			843,360
Deposits
Personal		245,777			–			78,500			527			79,027			324,804
Business and government		364,451			–			153,395			655			154,050			518,501
Bank		19,070			–			7,439			9			7,448			26,518
		629,298			–			239,334			1,191			240,525			869,823
Obligations related to assets sold under repurchase agreements and securities loaned		18,309			–			–			–			–			18,309
Other liabilities		56,200			–			1,004			8,515			9,519			65,719
Subordinated debentures		–			–			10,012			59			10,071			10,071
	$	703,807		$	–		$	250,350		$	9,765		$	260,115		$	963,922
(1)	Certain financial instruments have not been assigned to a level as the carrying amount approximates their fair values.
---	---
(2)	Included in Securities – Investment, net of applicable allowance on the Consolidated Balance Sheets.
---	---

Fair values of financial assets and liabilities carried at amortized cost and disclosed in the table above are determined using the following valuation techniques and inputs.

164 Royal Bank of Canada: Annual Report 2021 Consolidated Financial Statements

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Amortized cost securities

Fair values of government bonds, corporate bonds, and ABS are based on quoted prices. Fair values of certain Non-OECD government bonds are based on vendor prices or the discounted cash flow method with yield curves of other countries’ government bonds as inputs. For ABS, where market prices are not available, the fair value is determined using the discounted cash flow method. The inputs to the valuation model generally include market interest rates, spreads and yields derived from comparable securities, prepayment, and LGD.

Assets purchased under reverse repurchase agreements and securities borrowed, and Obligations related to assets sold under repurchase agreements and securities loaned

Valuation methods used for the long-term instruments are described in the Fair value of assets and liabilities measured on a recurring basis and classified using the fair value hierarchy section of this note. The carrying values of short-term instruments generally approximate their fair values.

Loans – Retail

Retail loans include residential mortgages, personal and small business loans and credit cards. For residential mortgages, and personal and small business loans, we segregate the portfolio based on certain attributes such as product type, contractual interest rate, term to maturity and credit scores, if applicable. Fair values of these loans are determined by the discounted cash flow method using applicable inputs such as prevailing interest rates, contractual and posted client rates, client discounts, credit spreads, prepayment rates and loan-to-value (LTV) ratios. Fair values of credit card receivables are also calculated based on a discounted cash flow method with portfolio yields, write-offs and monthly payment rates as inputs. The carrying values of short-term and variable rate loans generally approximate their fair values.

Loans – Wholesale

Where market prices are available, wholesale loans are valued based on market prices. Otherwise, fair value is determined by the discounted cash flow method using the following inputs: market interest rates and market based spreads of assets with similar credit ratings and terms to maturity, LGD, expected default frequency implied from credit default swap prices, if available, and relevant pricing information such as contractual rate, origination and maturity dates, redemption price, coupon payment frequency and date convention.

Deposits

Deposits are comprised of demand, notice, and term deposits which include senior deposit notes we have issued to provide us with long-term funding. Fair values of term deposits are determined by one of several valuation techniques: (i) for term deposits and similar instruments, we segregate the portfolio based on term to maturity. Fair values of these instruments are determined by the discounted cash flow method using inputs such as client rates for new sales of the corresponding terms; and (ii) for senior deposit notes, we use actual traded prices, vendor prices or the discounted cash flow method using a market interest rate curve and our funding spreads as inputs. The carrying values of demand, notice, and short-term term deposits generally approximate their fair values.

Other assets and Other liabilities

Other assets and Other liabilities include receivables and payables relating to certain commodities. Fair values of the commodity receivables and payables are calculated by the discounted cash flow method using applicable inputs such as market interest rates, counterparties’ credit spreads, our funding spreads, commodity forward prices and spot prices.

Subordinated debentures

Fair values of Subordinated debentures are based on market prices, dealer quotes or vendor prices when available. Where prices cannot be observed, fair value is determined using the discounted cash flow method, with applicable inputs such as market interest rates and credit spreads.

Consolidated Financial Statements Royal Bank of Canada: Annual Report 2021 165

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Note 4 Securities

Carrying value of securities

	As at October 31, 2021
	Term to maturity<br><br>(1)
(Millions of Canadian dollars)	Within<br> 3 months		3 months<br> to 1 year		1 year to<br> 5 years		5 years to<br> 10 years		Over<br> 10 years		With no<br> specific<br> maturity		Total
Trading<br><br>(2)
Debt issued or guaranteed by:
Canadian government	$	1,244	$	4,252	$	6,187	$	3,339	$	7,403	$	–	$	22,425
U.S. federal, state, municipal and agencies		2,381		1,616		6,203		4,092		8,686		–		22,978
Other OECD government		2,049		2,073		1,231		294		2,812		–		8,459
Mortgage-backed securities		–		–		–		–		4		–		4
Asset-backed securities		288		27		275		116		187		–		893
Corporate debt and other debt
Bankers’ acceptances		316		135		–		–		–		–		451
Certificates of deposit		–		–		–		–		–		–		–
Other <br>(3)		2,317		2,526		5,433		3,716		8,667		–		22,659
Equities												61,371		61,371
		8,595		10,629		19,329		11,557		27,759		61,371		139,240
Fair value through other comprehensive income<br><br>(2)
Debt issued or guaranteed by:
Canadian government
Federal
Amortized cost		161		1,180		1,382		592		526		–		3,841
Fair value		161		1,178		1,375		544		445		–		3,703
Yield <br>(4)		0.4%		0.7%		1.8%		0.9%		2.4%		–		1.3%
Provincial and municipal
Amortized cost		3		283		1,326		158		1,558		–		3,328
Fair value		3		283		1,322		158		1,366		–		3,132
Yield <br>(4)		4.2%		2.6%		2.4%		1.7%		2.9%		–		2.6%
U.S. federal, state, municipal and agencies
Amortized cost		1,131		5,010		7,960		2,380		18,197		–		34,678
Fair value		1,132		5,013		7,960		2,446		18,276		–		34,827
Yield <br>(4)		–		0.9%		0.4%		2.6%		1.3%		–		1.1%
Other OECD government
Amortized cost		176		1,274		4,498		1		–		–		5,949
Fair value		176		1,274		4,505		1		–		–		5,956
Yield <br>(4)		1.7%		1.0%		1.3%		3.9%		–		–		1.2%
Mortgage–backed securities
Amortized cost		–		–		56		55		2,646		–		2,757
Fair value		–		–		56		55		2,636		–		2,747
Yield <br>(4)		–		–		1.2%		1.3%		1.2%		–		1.2%
Asset–backed securities
Amortized cost		–		–		–		4,719		2,935		–		7,654
Fair value		–		–		–		4,719		2,941		–		7,660
Yield <br>(4)		–		–		–		1.2%		1.3%		–		1.3%
Corporate debt and other debt
Amortized cost		5,965		2,597		9,676		1,451		42		–		19,731
Fair value		5,965		2,599		9,699		1,463		51		–		19,777
Yield <br>(4)		0.9%		1.2%		1.5%		0.8%		3.6%		–		1.2%
Equities
Cost												242		242
Fair value <br>(5)												533		533
Amortized cost		7,436		10,344		24,898		9,356		25,904		242		78,180
Fair value		7,437		10,347		24,917		9,386		25,715		533		78,335
Amortized Cost<br><br>(2)
Debt issued or guaranteed by:
Canadian government		453		2,979		17,589		3,601		194		–		24,816
U.S. federal, state, municipal and agencies		1,093		274		3,718		2,767		19,559		–		27,411
Other OECD government		1,914		1,212		2,790		58		–		–		5,974
Asset-backed securities		–		–		320		336		7		–		663
Corporate debt and other debt		1,133		2,072		4,424		633		23		–		8,285
Amortized cost, net of allowance		4,593		6,537		28,841		7,395		19,783		–		67,149
Fair value		4,597		6,567		28,701		7,311		19,647		–		66,823
Total carrying value of securities	$	20,625	$	27,513	$	73,087	$	28,338	$	73,257	$	61,904	$	284,724

166 Royal Bank of Canada: Annual Report 2021 Consolidated Financial Statements

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	As at October 31, 2020
	Term to maturity <br>(1)
(Millions of Canadian dollars)	Within<br> 3 months		3 months<br> to 1 year		1 year to<br> 5 years		5 years to<br> 10 years		Over<br> 10 years		With no<br> specific<br> maturity		Total
Trading<br><br>(2)
Debt issued or guaranteed by:
Canadian government	$	2,301	$	7,004	$	6,054	$	3,569	$	8,419	$	–	$	27,347
U.S. federal, state, municipal and agencies		559		4,532		12,546		4,134		14,810		–		36,581
Other OECD government		56		695		3,010		584		2,120		–		6,465
Mortgage-backed securities		–		–		–		–		39		–		39
Asset-backed securities		3		164		82		181		98		–		528
Corporate debt and other debt
Bankers’ acceptances		65		227		–		–		–		–		292
Certificates of deposit		2		63		35		7		4		–		111
Other <br>(3)		1,048		3,472		5,521		3,007		8,043		–		21,091
Equities												43,617		43,617
		4,034		16,157		27,248		11,482		33,533		43,617		136,071
Fair value through other comprehensive income<br><br>(2)
Debt issued or guaranteed by:
Canadian government
Federal
Amortized cost		–		204		1,689		272		397		–		2,562
Fair value		–		204		1,690		269		378		–		2,541
Yield <br>(4)		–		1.4%		1.4%		1.2%		1.4%		–		1.4%
Provincial and municipal
Amortized cost		5		908		629		7		1,688		–		3,237
Fair value		5		911		630		8		1,679		–		3,233
Yield <br>(4)		4.5%		1.3%		2.7%		4.3%		2.6%		–		2.2%
U.S. federal, state, municipal and agencies
Amortized cost		1,772		9,736		8,777		2,227		16,011		–		38,523
Fair value		1,775		9,739		8,779		2,237		15,994		–		38,524
Yield <br>(4)		0.1%		1.7%		1.1%		2.6%		2.2%		–		1.7%
Other OECD government
Amortized cost		274		2,288		4,773		1		–		–		7,336
Fair value		274		2,289		4,781		1		–		–		7,345
Yield <br>(4)		1.7%		2.4%		1.8%		3.6%		–		–		2.0%
Mortgage-backed securities
Amortized cost		–		–		–		192		2,226		–		2,418
Fair value		–		–		–		189		2,181		–		2,370
Yield <br>(4)		–		–		–		1.2%		1.2%		–		1.2%
Asset-backed securities
Amortized cost		–		–		10		4,294		4,059		–		8,363
Fair value		–		–		10		4,247		4,011		–		8,268
Yield <br>(4)		–		–		1.4%		1.4%		1.4%		–		1.4%
Corporate debt and other debt
Amortized cost		2,670		5,796		10,425		92		58		–		19,041
Fair value		2,670		5,801		10,466		106		71		–		19,114
Yield <br>(4)		0.9%		1.6%		1.5%		2.1%		2.4%		–		1.5%
Equities
Cost												276		276
Fair value <br>(5)												525		525
Amortized cost		4,721		18,932		26,303		7,085		24,439		276		81,756
Fair value		4,724		18,944		26,356		7,057		24,314		525		81,920
Amortized Cost<br><br>(2)
Debt issued or guaranteed by:
Canadian government		438		1,862		16,044		1,819		–		–		20,163
U.S. federal, state, municipal and agencies		8		787		1,615		1,622		18,281		–		22,313
Other OECD government		2,178		2,045		2,643		–		–		–		6,866
Asset-backed securities		–		1		159		–		–		–		160
Corporate debt and other debt		625		2,644		4,805		219		28		–		8,321
Amortized cost, net of allowance		3,249		7,339		25,266		3,660		18,309		–		57,823
Fair value		3,252		7,392		25,663		3,798		18,522		–		58,627
Total carrying value of securities	$	12,007	$	42,440	$	78,870	$	22,199	$	76,156	$	44,142	$	275,814
(1)	Actual maturities may differ from contractual maturities shown above as borrowers may have the right to extend or prepay obligations with or without penalties.
---	---
(2)	Trading securities and FVOCI securities are recorded at fair value. Amortized cost securities, included in Investment securities, are recorded at amortized cost and presented net of allowance for credit losses.
---	---
(3)	Primarily composed of corporate debt, supra-national debt, and commercial paper.
---	---
(4)	The weighted average yield is derived using the contractual interest rate and the carrying value at the end of the year for the respective securities.
---	---
(5)	Certain equity securities that are not <br>held-for-trading<br> purposes are designated as FVOCI.
---	---

Consolidated Financial Statements Royal Bank of Canada: Annual Report 2021 167

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Note 4 Securities<br><br>(continued)

Unrealized gains and losses on securities at FVOCI

(1), (2)

	As at
	October 31, 2021									October 31, 2020
(Millions of Canadian dollars)	Cost/<br> Amortized<br> cost		Gross<br> unrealized<br> gains		Gross<br> unrealized<br> losses			Fair<br> value		Cost/<br> Amortized<br> cost		Gross<br> unrealized<br> gains		Gross<br> unrealized<br> losses			Fair<br> value
Debt issued or guaranteed by:
Canadian government
Federal <br>(3)	$	3,841	$	1	$	(139	)	$	3,703	$	2,562	$	1	$	(22	)	$	2,541
Provincial and municipal		3,328		3		(199	)		3,132		3,237		27		(31	)		3,233
U.S. federal, state, municipal and agencies <br>(3)		34,678		353		(204	)		34,827		38,523		323		(322	)		38,524
Other OECD government		5,949		8		(1	)		5,956		7,336		11		(2	)		7,345
Mortgage-backed securities <br>(3)		2,757		2		(12	)		2,747		2,418		5		(53	)		2,370
Asset-backed securities
CDO		7,074		1		(1	)		7,074		7,504		–		(90	)		7,414
Non-CDO<br> securities		580		6		–			586		859		2		(7	)		854
Corporate debt and other debt		19,731		57		(11	)		19,777		19,041		76		(3	)		19,114
Equities		242		292		(1	)		533		276		253		(4	)		525
	$	78,180	$	723	$	(568	)	$	78,335	$	81,756	$	698	$	(534	)	$	81,920
(1)	Excludes $67,149 million of <br>held-to-collect<br> securities as at October 31, 2021 that are carried at amortized cost, net of allowance for credit losses (October 31, 2020 – $57,823 million).
---	---
(2)	Gross unrealized gains and losses includes $(9) million of allowance for credit losses on debt securities at FVOCI as at October 31, 2021 (October 31, 2020 – $8 million) recognized in income and Other components of equity.
---	---
(3)	The majority of the MBS are residential. Cost/Amortized cost, Gross unrealized gains, Gross unrealized losses and Fair value related to commercial MBS are $2,603 million, $1 million, $12 million and $2,592 million, respectively as at October 31, 2021 (October 31, 2020 – $2,185 million, $nil, $48 million and $2,137 million, respectively).
---	---

Allowance for credit losses on investment securities

The following tables reconcile the opening and closing allowance for debt securities at FVOCI and amortized cost by stage. Reconciling items include the following:

•	Model changes, which generally comprise the impact of significant changes to the quantitative models used to estimate expected credit losses and any staging impacts that may arise.
•	Transfers between stages, which are presumed to occur before any corresponding remeasurement of the allowance.
---	---
•	Purchases, which reflect the allowance related to assets newly recognized during the period, including those assets that were derecognized following a modification of terms.
---	---
•	Sales and maturities, which reflect the allowance related to assets derecognized during the period without a credit loss being incurred, including those assets that were derecognized following a modification of terms.
---	---
•	Changes in risk, parameters and exposures, which comprise the impact of changes in model inputs or assumptions, including changes in forward-looking macroeconomic conditions; partial repayments; changes in the measurement following a transfer between stages; and unwinding of the time value discount due to the passage of time.
---	---

Allowance for credit losses – securities at FVOCI

(1)

	For the year ended
	October 31, 2021												October 31, 2020
	Performing						Impaired						Performing					Impaired
(Millions of Canadian dollars)	Stage 1			Stage 2			Stage 3<br>(2)			Total			Stage 1			Stage 2		Stage 3 (2)			Total
Balance at beginning of period	$	12		$	–		$	(4	)	$	8		$	4		$	–	$	(7	)	$	(3	)
Provision for credit losses
Model changes		(4	)		–			–			(4	)		–			–		–			–
Transfers to stage 1		1			(1	)		–			–			–			–		–			–
Transfers to stage 2		–			–			–			–			–			–		–			–
Transfers to stage 3		–			–			–			–			–			–		–			–
Purchases		8			–			–			8			18			–		–			18
Sales and maturities		(10	)		(1	)		–			(11	)		(13	)		–		–			(13	)
Changes in risk, parameters and exposures		(4	)		3			(9	)		(10	)		3			–		4			7
Exchange rate and other		(1	)		–			1			–			–			–		(1	)		(1	)
Balance at end of period	$	2		$	1		$	(12	)	$	(9	)	$	12		$	–	$	(4	)	$	8
(1)	Expected credit losses on debt securities at FVOCI are not separately recognized on the balance sheet as the related securities are recorded at fair value. The cumulative amount of credit losses recognized in income is presented in Other components of equity.
---	---
(2)	Reflects changes in the allowance for purchased credit impaired securities.
---	---

168 Royal Bank of Canada: Annual Report 2021 Consolidated Financial Statements

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Allowance for credit losses – securities at amortized cost

	For the year ended
	October 31, 2021											October 31, 2020
	Performing						Impaired					Performing						Impaired
(Millions of Canadian dollars)	Stage 1			Stage 2			Stage 3		Total			Stage 1			Stage 2			Stage 3		Total
Balance at beginning of period	$	10		$	19		$	–	$	29		$	5		$	19		$	–	$	24
Provision for credit losses
Model changes		(4	)		–			–		(4	)		–			–			–		–
Transfers to stage 1		–			–			–		–			–			–			–		–
Transfers to stage 2		–			–			–		–			–			–			–		–
Transfers to stage 3		–			–			–		–			–			–			–		–
Purchases		9			–			–		9			9			–			–		9
Sales and maturities		(1	)		–			–		(1	)		(2	)		–			–		(2	)
Changes in risk, parameters and exposures		(9	)		1			–		(8	)		(2	)		1			–		(1	)
Exchange rate and other		–			(2	)		–		(2	)		–			(1	)		–		(1	)
Balance at end of period	$	5		$	18		$	–	$	23		$	10		$	19		$	–	$	29

Credit risk exposure by internal risk rating

The following table presents the fair value of debt securities at FVOCI and gross carrying amount of securities at amortized cost. Risk ratings are based on internal ratings used in the measurement of expected credit losses, as at the reporting date, as outlined in the internal ratings maps in the Credit risk section of Management’s Discussion and Analysis.

	As at
	October 31, 2021								October 31, 2020
	Performing				Impaired				Performing				Impaired
(Millions of Canadian dollars)	Stage 1		Stage 2		Stage 3<br>(1)		Total		Stage 1		Stage 2		Stage 3 (1)		Total
Investment securities
Securities at FVOCI
Investment grade	$	77,147	$	82	$	–	$	77,229	$	80,719	$	87	$	–	$	80,806
Non-investment<br> grade		423		–		–		423		431		1		–		432
Impaired		–		–		150		150		–		–		157		157
		77,570		82		150		77,802		81,150		88		157		81,395
Items not subject to impairment <br>(2)								533								525
							$	78,335							$	81,920
Securities at amortized cost
Investment grade	$	66,033	$	–	$	–	$	66,033	$	56,885	$	–	$	–	$	56,885
Non-investment<br> grade		928		211		–		1,139		647		320		–		967
Impaired		–		–		–		–		–		–		–		–
		66,961		211		–		67,172		57,532		320		–		57,852
Allowance for credit losses		5		18		–		23		10		19		–		29
Amortized cost	$	66,956	$	193	$	–	$	67,149	$	57,522	$	301	$	–	$	57,823
(1)	Reflects $150 million of purchased credit impaired securities (October 31, 2020 – $157 million).
---	---
(2)	Investment securities at FVOCI not subject to impairment represent equity securities designated as FVOCI.
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Consolidated Financial Statements Royal Bank of Canada: Annual Report 2021 169

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Note 5 Loans and allowance for credit losses

Loans by geography and portfolio net of allowance

	As at October 31, 2021
(Millions of Canadian dollars)	Canada		United<br> States		Other<br> International		Total		Allowance for<br> loan losses<br><br>(1)			Total net<br> of allowance
Retail <br>(2)
Residential mortgages	$	354,169	$	23,423	$	2,740	$	380,332	$	(416	)	$	379,916
Personal		78,232		11,794		3,415		93,441		(973	)		92,468
Credit cards <br>(3)		17,235		384		203		17,822		(852	)		16,970
Small business <br>(4), (5)		12,003		–		–		12,003		(168	)		11,835
Wholesale <br>(2), (5)		88,083		86,028		43,955		218,066		(1,680	)		216,386
Total loans	$	549,722	$	121,629	$	50,313	$	721,664	$	(4,089	)	$	717,575
Undrawn loan commitments – Retail		240,242		3,713		1,989		245,944		(136	)
Undrawn loan commitments – Wholesale		107,070		189,177		75,331		371,578		(105	)
	As at October 31, 2020
(Millions of Canadian dollars)	Canada		United<br> States		Other<br> International		Total		Allowance for<br> loan losses <br>(1)			Total net<br> of allowance
Retail <br>(2)
Residential mortgages	$	319,287	$	20,331	$	2,979	$	342,597	$	(515	)	$	342,082
Personal		79,778		9,050		3,183		92,011		(1,185	)		90,826
Credit cards <br>(3)		17,060		340		226		17,626		(1,211	)		16,415
Small business <br>(4)		5,742		–		–		5,742		(123	)		5,619
Wholesale <br>(2), (6), (7)		87,785		85,941		34,929		208,655		(2,605	)		206,050
Total loans	$	509,652	$	115,662	$	41,317	$	666,631	$	(5,639	)	$	660,992
Undrawn loan commitments – Retail		226,439		4,314		1,628		232,381		(176	)
Undrawn loan commitments – Wholesale<br><br>(7)		109,900		183,847		67,280		361,027		(187	)
(1)	Excludes allowance for loans measured at FVOCI of $14 <br>million<br>(October 31, 2020 – $6 million).
---	---
(2)	Geographic information is based on residence of the borrower.
---	---
(3)	The credit cards business is managed as a single portfolio and includes both consumer and business cards.
---	---
(4)	Includes small business exposure managed on a pooled basis.
---	---
(5)	Commencing Q2 2021, certain loans are now classified as Retail – Small business and were previously classified as Wholesale, reflecting an alignment with capital measurement and reporting.
---	---
(6)	Includes small business exposure managed on an individual client basis.
---	---
(7)	A<br>mounts by geography have been revised from those previously presented.
---	---

Loans maturity and rate sensitivity

	As at October 31, 2021
	Maturity term<br><br>(1)									Rate sensitivity
(Millions of Canadian dollars)	Under<br> 1 year<br><br>(2)		1 to 5<br> years		Over 5<br> years		Total			Floating		Fixed<br> Rate		Non-rate-<br><br> sensitive		Total
Retail <br>(3)	$	249,363	$	222,408	$	31,827	$	503,598		$	166,910	$	329,185	$	7,503	$	503,598
Wholesale <br>(3)		174,345		33,882		9,839		218,066			36,143		179,588		2,335		218,066
Total loans	$	423,708	$	256,290	$	41,666	$	721,664		$	203,053	$	508,773	$	9,838	$	721,664
Allowance for loan losses								(4,089	)								(4,089	)
Total loans net of allowance for loan losses							$	717,575								$	717,575
	As at October 31, 2020
	Maturity term <br>(1)									Rate sensitivity
(Millions of Canadian dollars)	Under<br> 1 year <br>(2)		1 to 5<br> years		Over 5<br> years		Total			Floating		Fixed<br> Rate		Non-rate-<br><br> sensitive		Total
Retail	$	213,946	$	218,342	$	25,688	$	457,976		$	129,870	$	322,122	$	5,984	$	457,976
Wholesale		160,031		37,346		11,278		208,655			34,686		171,171		2,798		208,655
Total loans	$	373,977	$	255,688	$	36,966	$	666,631		$	164,556	$	493,293	$	8,782	$	666,631
Allowance for loan losses								(5,639	)								(5,639	)
Total loans net of allowance for loan losses							$	660,992								$	660,992
(1)	Generally, based on the earlier of contractual repricing or maturity date.
---	---
(2)	Includes variable rate loans that can be repriced at the clients’ discretion without penalty.
---	---
(3)	Commencing Q2 2021, certain loans are now classified as Retail – Small business and were previously classified as Wholesale, reflecting an alignment with capital measurement and reporting.
---	---

170 Royal Bank of Canada: Annual Report 2021 Consolidated Financial Statements

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Allowance for credit losses

	For the year ended
	October 31, 2021													October 31, 2020
(Millions of Canadian dollars)	Balance at<br> beginning<br> of period		Provision<br> for credit<br> losses			Net<br> <br>write-offs<br>(1)			Exchange<br> rate and<br> other			Balance<br> at end<br> of period		Balance at<br> beginning<br> of period		Provision<br> for credit<br> losses		Net<br> <br>write-offs (1)			Exchange<br> rate and<br> other			Balance<br> at end<br> of period
Retail
Residential mortgages	$	518	$	(43	)	$	(27	)	$	(32	)	$	416	$	402	$	190	$	(34	)	$	(40	)	$	518
Personal		1,309		23			(247	)		(6	)		1,079		935		801		(411	)		(16	)		1,309
Credit cards		1,246		(72	)		(297	)		(2	)		875		832		900		(484	)		(2	)		1,246
Small business		140		12			(23	)		48			177		61		117		(31	)		(7	)		140
Wholesale		2,795		(560	)		(200	)		(238	)		1,797		1,165		2,140		(380	)		(130	)		2,795
Customers’ liability under acceptances		107		(32	)		–			–			75		24		83		–			–			107
	$	6,115	$	(672	)	$	(794	)	$	(230	)	$	4,419	$	3,419	$	4,231	$	(1,340	)	$	(195	)	$	6,115
Presented as:
Allowance for loan losses	$	5,639										$	4,089	$	3,100									$	5,639
Other liabilities – Provisions		363											241		295										363
Customers’ liability under acceptances		107											75		24										107
Other components of equity		6											14		–										6
(1)	Loans <br>written-off<br> are generally subject to continued collection efforts for a period of time following <br>write-off.<br> The contractual amount outstanding on loans <br>written-off<br> during the year ended October 31, 2021 that are no longer subject to enforcement activity was $93 million (October 31, 2020 – $193 million).
---	---

The following table reconciles the opening and closing allowance for each major product of loans and commitments as determined by our modelled, scenario-weighted allowance and the application of expert credit judgment as applicable. Reconciling items include the following:

•	Model changes, which generally comprise the impact of significant changes to the quantitative models used to estimate expected credit losses and any staging impacts that may arise.
•	Transfers between stages, which are presumed to occur before any corresponding remeasurements of the allowance.
---	---
•	Originations, which reflect the allowance related to assets newly recognized during the period, including those assets that were derecognized following a modification of terms.
---	---
•	Maturities, which reflect the allowance related to assets derecognized during the period without a credit loss being incurred, including those assets that were derecognized following a modification of terms.
---	---
•	Changes in risk, parameters and exposures, which comprise the impact of changes in model inputs or assumptions, including changes in forward-looking macroeconomic conditions; partial repayments and additional draws on existing facilities; changes in the measurement following a transfer between stages; and unwinding of the time value discount due to the passage of time in stage 1 and stage 2.
---	---

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Note 5 Loans and allowance for credit losses<br><br>(continued)

Allowance for credit losses – Retail and wholesale loans

	For the year ended
	October 31, 2021												October 31, 2020
	Performing						Impaired						Performing						Impaired
(Millions of Canadian dollars)	Stage 1			Stage 2			Stage 3			Total			Stage 1			Stage 2			Stage 3			Total
Residential mortgages
Balance at beginning of period	$	206		$	160		$	152		$	518		$	146		$	77		$	179		$	402
Provision for credit losses
Model changes		(6	)		(5	)		–			(11	)		–			–			–			–
Transfers to stage 1		205			(182	)		(23	)		–			221			(186	)		(35	)		–
Transfers to stage 2		(14	)		18			(4	)		–			(35	)		42			(7	)		–
Transfers to stage 3		(2	)		(44	)		46			–			(3	)		(33	)		36			–
Originations		113			–			–			113			76			–			–			76
Maturities		(30	)		(24	)		–			(54	)		(16	)		(15	)		–			(31	)
Changes in risk, parameters and exposures		(284	)		178			15			(91	)		(180	)		291			34			145
Write-offs		–			–			(37	)		(37	)		–			–			(44	)		(44	)
Recoveries		–			–			10			10			–			–			10			10
Exchange rate and other		(2	)		(9	)		(21	)		(32	)		(3	)		(16	)		(21	)		(40	)
Balance at end of period	$	186		$	92		$	138		$	416		$	206		$	160		$	152		$	518
Personal
Balance at beginning of period	$	480		$	733		$	96		$	1,309		$	272		$	520		$	143		$	935
Provision for credit losses
Model changes		(1	)		–			–			(1	)		–			–			–			–
Transfers to stage 1		710			(706	)		(4	)		–			494			(487	)		(7	)		–
Transfers to stage 2		(97	)		97			–			–			(107	)		109			(2	)		–
Transfers to stage 3		(3	)		(58	)		61			–			(3	)		(64	)		67			–
Originations		128			–			–			128			118			–			–			118
Maturities		(96	)		(130	)		–			(226	)		(49	)		(97	)		–			(146	)
Changes in risk, parameters and exposures		(697	)		633			186			122			(245	)		756			318			829
Write-offs		–			–			(387	)		(387	)		–			–			(545	)		(545	)
Recoveries		–			–			140			140			–			–			134			134
Exchange rate and other		(2	)		–			(4	)		(6	)		–			(4	)		(12	)		(16	)
Balance at end of period	$	422		$	569		$	88		$	1,079		$	480		$	733		$	96		$	1,309
Credit cards
Balance at beginning of period	$	364		$	882		$	–		$	1,246		$	173		$	659		$	–		$	832
Provision for credit losses
Transfers to stage 1		723			(723	)		–			–			470			(470	)		–			–
Transfers to stage 2		(105	)		105			–			–			(98	)		98			–			–
Transfers to stage 3		(4	)		(309	)		313			–			(2	)		(372	)		374			–
Originations		6			–			–			6			7			–			–			7
Maturities		(7	)		(31	)		–			(38	)		(8	)		(29	)		–			(37	)
Changes in risk, parameters and exposures		(742	)		719			(17	)		(40	)		(177	)		997			110			930
Write-offs		–			–			(460	)		(460	)		–			–			(617	)		(617	)
Recoveries		–			–			163			163			–			–			133			133
Exchange rate and other		(2	)		(1	)		1			(2	)		(1	)		(1	)		–			(2	)
Balance at end of period	$	233		$	642		$	–		$	875		$	364		$	882		$	–		$	1,246
Small business
Balance at beginning of period	$	78		$	29		$	33		$	140		$	29		$	10		$	22		$	61
Provision for credit losses
Model changes		3			1			–			4			–			–			–			–
Transfers to stage 1		57			(57	)		–			–			12			(12	)		–			–
Transfers to stage 2		(11	)		11			–			–			(11	)		11			–			–
Transfers to stage 3		(1	)		(2	)		3			–			–			(2	)		2			–
Originations		36			–			–			36			20			–			–			20
Maturities		(21	)		(22	)		–			(43	)		(7	)		(6	)		–			(13	)
Changes in risk, parameters and exposures		(77	)		64			28			15			35			28			47			110
Write-offs		–			–			(32	)		(32	)		–			–			(38	)		(38	)
Recoveries		–			–			9			9			–			–			7			7
Exchange rate and other		24			31			(7	)		48			–			–			(7	)		(7	)
Balance at end of period	$	88		$	55		$	34		$	177		$	78		$	29		$	33		$	140
Wholesale
Balance at beginning of period	$	995		$	1,132		$	668		$	2,795		$	281		$	396		$	488		$	1,165
Provision for credit losses
Model changes		1			24			–			25			–			–			–			–
Transfers to stage 1		581			(576	)		(5	)		–			154			(149	)		(5	)		–
Transfers to stage 2		(132	)		161			(29	)		–			(200	)		221			(21	)		–
Transfers to stage 3		(4	)		(60	)		64			–			(14	)		(116	)		130			–
Originations		601			–			–			601			860			–			–			860
Maturities		(488	)		(500	)		–			(988	)		(479	)		(301	)		–			(780	)
Changes in risk, parameters and exposures		(931	)		689			44			(198	)		410			1,091			559			2,060
Write-offs		–			–			(253	)		(253	)		–			–			(437	)		(437	)
Recoveries		–			–			53			53			–			–			57			57
Exchange rate and other		(57	)		(76	)		(105	)		(238	)		(17	)		(10	)		(103	)		(130	)
Balance at end of period	$	566		$	794		$	437		$	1,797		$	995		$	1,132		$	668		$	2,795

172 Royal Bank of Canada: Annual Report 2021 Consolidated Financial Statements

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Key inputs and assumptions

The measurement of expected credit losses is a complex calculation that involves a large number of interrelated inputs and assumptions and the allowance is not sensitive to any one single factor alone. The key drivers of changes in expected credit losses include the following:

•	Changes in the credit quality of the borrower or instrument, primarily reflected in changes in internal risk ratings;
•	Changes in forward-looking macroeconomic conditions, specifically the macroeconomic variables to which our models are calibrated, which are those most closely correlated with credit losses in the relevant portfolio;
---	---
•	Changes in scenario design and the weights assigned to each scenario; and
---	---
•	Transfers between stages, which can be triggered by changes to any of the above inputs.
---	---

While the global economic recovery has continued throughout fiscal 2021, momentum has waned over the year amid ongoing uncertainty regarding the extent and duration of the impacts of the COVID-19 pandemic. The reopening of economies and significant fiscal and monetary policy stimulus have generally supported lower defaults, and are contributing to stronger GDP growth and improved labour markets globally, though this remains uneven. Though increasing vaccination rates are expected to support a continued economic recovery, exceptional government support programs have begun to wind down, and uncertainty remains regarding the duration and ultimate impact on future losses from these programs. Supply chain disruptions, rising business input costs, and labour shortages are also limiting the pace of further improvement and adding to rising inflation concerns. As these factors may impact future losses, our allowances continue to require the application of heightened judgment, as there is a higher than usual degree of uncertainty and the inputs used are inherently subject to change, which may materially change our estimate of Stage 1 and Stage 2 allowance for credit losses in future periods.

To address the uncertainties inherent in the current and future environment and to reflect relevant risk factors not captured in our modelled results, we applied expert credit judgment in determining significant increases in credit risk since origination and our weighted allowance for credit losses. In light of the significant uncertainty on the progress of the economic recovery, the impact of expert credit judgment on our allowances remains elevated as compared to pre-pandemic levels. We applied quantitative and qualitative adjustments for the impacts of the unprecedented macroeconomic environment, including the impact of government support programs in offsetting the effect of COVID-19 related unemployment on the economy and on mitigating the losses for the sectors most sensitive to the economic impact of the COVID-19 pandemic.

Internal risk ratings

Internal risk ratings are assigned according to the risk management framework outlined under the headings “Wholesale credit risk” and “Retail credit risk” of the Credit risk section of Management’s Discussion and Analysis. Changes in internal risk ratings are primarily reflected in the PD parameters, which are estimated based on our historical loss experience at the relevant risk segment or risk rating level, adjusted for forward-looking information.

Forward looking macroeconomic variables

The PD, LGD and EAD inputs used to estimate stage 1 and stage 2 credit loss allowances are modelled based on the macroeconomic variables (or changes in macroeconomic variables) that are most closely correlated with credit losses in the relevant portfolio. Each macroeconomic scenario used in our expected credit loss calculation includes a projection of all relevant macroeconomic variables used in our models for a five year horizon, reverting to long-run averages generally within the 2 to 5 year period. Depending on their usage in the models, macroeconomic variables are projected at a country, province/state or more granular level. These include one or more of the variables described below, which differ by portfolio and region.

Our allowance for credit losses reflects our economic outlook as at October 31, 2021. Subsequent changes to this forecast and related estimates will be reflected in our allowance for credit losses in future periods. All of our IFRS 9 scenarios are designed to include the impact of COVID-19. Despite positive developments and continuous economic improvement, the possibility of a more prolonged recovery period, including monetary policy responses to rising inflation rates brought on in part by global supply chain disruptions, as well as heightened risk in the real estate sector, have been reflected in our scenario design and weights.

Our base scenario reflects a continuation of the recovery that has been underway since the sharp drop in economic activity in calendar Q2 2020. Canadian and U.S. unemployment rates are expected to r e main above pre-shock levels at the end of calendar 2021 and we expect GDP to continue growing from Q4 2021 consistent with our expectation that higher vaccination rates will enable a more significant and sustainable easing of containment measures.

Downside scenarios, including two additional and more severe downside scenarios designed for the energy and real estate sectors, reflect the possibility of a second macroeconomic shock beginning in calendar 2022, in addition to the first shock in Q2 2020, with conditions deteriorating from Q4 2021 levels for up to 18 months, followed by a recovery for the remainder of the period. These scenarios assume a monetary policy response that returns the economy to a long-run, sustainable growth rate within the forecast period. The possibility of a more prolonged recovery period, including monetary policy responses to elevated inflation rates which may increase credit risk, have been reflected in our general downside scenario.

The upside scenario reflects a slightly faster and larger economic recovery than the base scenario, without prompting an offsetting monetary policy response, followed by a return to a long-run sustainable growth rate within the forecast period.

Consolidated Financial Statements Royal Bank of Canada: Annual Report 2021 173

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Note 5 Loans and allowance for credit losses<br><br>(continued)

The following provides additional detail about our forecasts for certain key macroeconomic variables used in the models to estimate ACL on performing loans, commitments and acceptances:

•	Unemployment<br> – In our base forecast, calendar Q4 2021 unemployment rates are expected to decline to 6.7% in Canada and 4.7% in the U.S. We expect unemployment rates to continuously improve in both regions for the remainder of the year. We expect the Canadian unemployment rate to stabilize around its long run equilibrium by the latter half of calendar 2022 and for the U.S. unemployment rate to improve to better than the long run equilibrium beginning in calendar Q2 2022 reverting to the long run equilibrium towards the latter end of the forecast horizon.
•	Gross Domestic Product (GDP)<br> – In our base forecast, we expect Canadian GDP in calendar Q4 2021 to be 0.5% above pre-shock levels and 2.7% above such levels in the U.S., with continuous improvement over the forecast horizon.
---	---
•	Oil price (West Texas Intermediate in US$)<br> – In our base forecast, we expect oil prices to average $71 per barrel over the next 12 months and $56 per barrel in the following 2 to 5 years. The range of average prices in our alternative energy downside and upside scenarios is $27 to $89 per barrel for the next 12 months and $36 to $61 per barrel for the following 2 to 5 years. As at October 31, 2020, our base forecast included an average price of $43 per barrel for the next 12 months and $48 per barrel for the following 2 to 5 years.
---	---
•	Canadian housing price index<br> – In our base forecast, we expect housing prices to grow by 0.1% over the next 12 months, with a compound annual growth rate of 4.1% for the following 2 to 5 years. The range of annual housing price growth (contraction) in our alternative real estate downside and upside scenarios is (29.6)% to 10.9% over the next 12 months and 4.2% to 9.6% for the following 2 to 5 years. As at October 31, 2020, our base forecast included housing price growth of 0.6% for the next 12 months and 4.5% for the following 2 to 5 years.
---	---

The primary variables driving credit losses in our retail portfolios are Canadian unemployment rates, Canadian GDP and Canadian housing price index. The Canadian overnight interest rate also impacts our retail portfolios. Our wholesale portfolios are affected by all of the variables discussed above; however, the specific variables differ by sector. Other variables also impact our wholesale portfolios including, but not limited to, Canadian and U.S. 10 year BBB corporate bond yield and credit spreads, 10 year government bond yields, Canadian consumer confidence index, Canadian and U.S. commercial real estate price indices, U.S. housing price index, natural gas prices (Henry Hub), and S&P 500 and EuroStoxx equity indices.

Increases in the following macroeconomic variables will generally correlate with higher expected credit losses: Canadian and U.S. unemployment rates, Canadian overnight interest rates, Canadian and U.S. 10 year BBB corporate bond yield and credit spreads, and 10 year government bond yields.

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Increases in the following macroeconomic variables will generally correlate with lower expected credit losses: Canadian and U.S. housing price indices, Canadian and U.S. GDP, Canadian consumer confidence index, Canadian and U.S. commercial real estate price indices, oil and natural gas prices, and S&P 500 and EuroStoxx equity indices.

Scenario design and weightings

Our estimation of expected credit losses in Stage 1 and Stage 2 considers five distinct future macroeconomic scenarios. Scenarios are designed to capture a wide range of possible outcomes and are weighted according to our expectation of the relative likelihood of the range of outcomes that each scenario represents at the reporting date. We then weight each scenario to take into account historical frequency, current trends, and forward-looking conditions which will change over time. The base case scenario is based on forecasts of the expected rate, value or yield for each of the macroeconomic variables identified above. The upside and downside scenarios are set by adjusting our base projections to construct reasonably possible scenarios and weightings that are more optimistic and pessimistic, respectively, than the base case. As described above, two additional downside scenarios capture the non-linear nature of potential credit losses across our portfolios.

The impact of each of our five scenarios varies across our portfolios given the portfolios have different sensitivities to movements in each macroeconomic variable. As described above, all scenarios are designed to include the impact of the COVID-19 pandemic as at October 31, 2021, reflective of current market conditions which have improved relative to the prior year. In determining our IFRS 9 allowance for credit losses, and to reflect the continued uncertainty and downside risk of a slower recovery than contemplated in our base scenario, we reassessed our scenario weights to more heavily weight the downside scenarios relative to October 31, 2020.

The impact of weighting these multiple scenarios increased our ACL on performing loans, relative to our base scenario, by $726 million at October 31, 2021 (October 31, 2020 – $606 million).

Transfers between stages

Transfers between stage 1 and stage 2 are based on the assessment of significant increases in credit risk relative to initial recognition, as described in Note 2. The impact of moving from 12 months expected credit losses to lifetime expected credit losses, or vice versa, varies by product, reflects the economic recovery underway in 2021 following the sharp drop in economic activity in 2020 and is dependent on the expected remaining life at the date of the transfer. Stage transfers may result in significant fluctuations in expected credit losses.

The following table illustrates the impact of staging on our ACL by comparing our allowance if all performing loans were in stage 1 to the actual ACL recorded on these assets.

	As at
	October 31, 2021
	ACL – All performing<br> loans in Stage 1
Performing loans <br>(1)		2,521	1,125	3,646	4,028	1,031	$ 5,059

All values are in US Dollars.

(1)	Represents loans and commitments in stage 1 and stage 2.

Consolidated Financial Statements Royal Bank of Canada: Annual Report 2021 175

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Note 5 Loans and allowance for credit losses<br><br>(continued)

Credit risk exposure by internal risk rating

The following table presents the gross carrying amount of loans measured at amortized cost, and the full contractual amount of undrawn loan commitments subject to the impairment requirements of IFRS 9. Risk ratings are based on internal ratings used in the measurement of expected credit losses as at the reporting date, as outlined in the internal ratings maps for Wholesale and Retail facilities in the Credit risk section of Management’s Discussion and Analysis.

	As at
	October 31, 2021								October 31, 2020
(Millions of Canadian dollars)	Stage 1		Stage 2		Stage 3<br> (1)		Total		Stage 1		Stage 2		Stage 3 (1)		Total
Retail
Loans outstanding – Residential mortgages
Low risk	$	310,334	$	1,507	$	–	$	311,841	$	270,396	$	2,848	$	–	$	273,244
Medium risk		15,152		2,051		–		17,203		15,230		3,307		–		18,537
High risk		3,343		634		–		3,977		4,346		1,467		–		5,813
Not rated <br>(2)		45,512		913		–		46,425		43,176		936		–		44,112
Impaired		–		–		645		645		–		–		638		638
		374,341		5,105		645		380,091		333,148		8,558		638		342,344
Items not subject to impairment <br>(3)								241								253
Total							$	380,332							$	342,597
Loans outstanding – Personal
Low risk	$	72,267	$	698	$	–	$	72,965	$	71,245	$	1,084	$	–	$	72,329
Medium risk		4,974		4,551		–		9,525		3,974		5,415		–		9,389
High risk		687		1,045		–		1,732		817		1,416		–		2,233
Not rated <br>(2)		8,934		88		–		9,022		7,704		144		–		7,848
Impaired		–		–		197		197		–		–		212		212
Total	$	86,862	$	6,382	$	197	$	93,441	$	83,740	$	8,059	$	212	$	92,011
Loans outstanding – Credit cards
Low risk	$	12,864	$	24	$	–	$	12,888	$	11,824	$	63	$	–	$	11,887
Medium risk		1,646		1,645		–		3,291		1,596		2,360		–		3,956
High risk		136		937		–		1,073		132		1,105		–		1,237
Not rated <br>(2)		527		43		–		570		490		56		–		546
Total	$	15,173	$	2,649	$	–	$	17,822	$	14,042	$	3,584	$	–	$	17,626
Loans outstanding –Small business<br><br>(4)
Low risk	$	8,609	$	274	$	–	$	8,883	$	2,034	$	172	$	–	$	2,206
Medium risk		1,583		979		–		2,562		1,976		1,143		–		3,119
High risk		227		218		–		445		126		192		–		318
Not rated <br>(2)		4		–		–		4		9		–		–		9
Impaired		–		–		109		109		–		–		90		90
Total	$	10,423	$	1,471	$	109	$	12,003	$	4,145	$	1,507	$	90	$	5,742
Undrawn loan commitments – Retail
Low risk	$	229,516	$	574	$	–	$	230,090	$	214,176	$	887	$	–	$	215,063
Medium risk		9,475		133		–		9,608		10,402		291		–		10,693
High risk		1,205		97		–		1,302		1,141		129		–		1,270
Not rated <br>(2)		4,854		90		–		4,944		5,238		117		–		5,355
Total	$	245,050	$	894	$	–	$	245,944	$	230,957	$	1,424	$	–	$	232,381
Wholesale – Loans outstanding<br><br>(4)
Investment grade	$	62,975	$	226	$	–	$	63,201	$	50,998	$	328	$	–	$	51,326
Non-investment<br> grade		117,396		15,146		–		132,542		112,434		26,575		–		139,009
Not rated <br>(2)		9,339		430		–		9,769		7,093		432		–		7,525
Impaired		–		–		1,357		1,357		–		–		2,235		2,235
		189,710		15,802		1,357		206,869		170,525		27,335		2,235		200,095
Items not subject to impairment <br>(3)								11,197								8,560
Total							$	218,066							$	208,655
Undrawn loan commitments – Wholesale
Investment grade	$	246,539	$	1,122	$	–	$	247,661	$	242,244	$	1,022	$	–	$	243,266
Non-investment<br> grade		108,063		12,377		–		120,440		92,262		21,581		–		113,843
Not rated <br>(2)		3,476		1		–		3,477		3,918		–		–		3,918
Total	$	358,078	$	13,500	$	–	$	371,578	$	338,424	$	22,603	$	–	$	361,027
(1)	As at October 31, 2021, 86% of credit-impaired loans were either fully or partially collateralized (October 31, 2020 – 90%). For details on the types of collateral held against credit-impaired assets and our policies on collateral, refer to the Credit risk mitigation section of Management’s Discussion and Analysis.
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(2)	In certain cases where an internal risk rating is not assigned, we use other approved credit risk assessments or rating methodologies, policies and tools to manage our credit risk.
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(3)	Items not subject to impairment are loans held at FVTPL.
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(4)	Commencing Q2 2021, certain loans are now classified as Retail – Small business and were previously classified as Wholesale, reflecting an alignment with capital measurement and reporting.
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176 Royal Bank of Canada: Annual Report 2021 Consolidated Financial Statements

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Loans past due but not impaired

(1), (2)

	As at
	October 31, 2021						October 31, 2020
(Millions of Canadian dollars)	30 to 89 days		90 days<br> and greater		Total		30 to 89 days		90 days<br> and greater		Total
Retail	$	1,105	$	137	$	1,242	$	1,013	$	129	$	1,142
Wholesale		1,230		–		1,230		574		13		587
	$	2,335	$	137	$	2,472	$	1,587	$	142	$	1,729
(1)	Excludes loans less than 30 days past due as they are not generally representative of the borrowers’ ability to meet their payment obligations.
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(2)	Loans in our payment deferral programs established to help clients manage through the challenges of the <br>COVID-19<br> pandemic have been <br>re-aged<br> to current and are not aged further during the deferral period. Subsequent to the payment deferral period, loans will commence <br>re-aging<br> from current. Amounts presented may include loans past due as a result of administrative processes, such as mortgage loans on which payments are restrained pending payout due to sale or refinancing. Past due loans arising from administrative processes are not representative of the borrowers’ ability to meet their payment obligations.
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Loan modifications

For the year ended October 31, 2021, the amortized cost of the loans whose contractual terms were modified while in Stage 2 or Stage 3 was not material.

In 2020, we established relief programs to help clients manage through challenges of the COVID-19 pandemic through payment deferrals, interest rate reductions, covenant waivers, and refinancing or credit restructuring. In some cases, the original terms of the associated loans were renegotiated or otherwise modified, resulting in changes to the contractual terms of the loans that affect the contractual cash flows. For the year ended October 31, 2020, the amortized cost of the loans whose contractual terms were modified while in Stage 2 or Stage 3 at the quarter ended before the modification was $8,437 million, resulting in no material modification losses. The gross carrying amount of loans transferred to Stage 1 as a result of the modification whose contractual terms were previously modified while in Stage 2 or Stage 3 was not material for the years ended October 31, 2020 and October 31, 2021.

Note 6 Derecognition of financial assets

We enter into transactions in which we transfer financial assets such as loans or securities to structured entities or other third parties. The majority of assets transferred under repurchase agreements, securities lending agreements, and in our Canadian residential mortgage securitization transactions do not qualify for derecognition as we continue to be exposed to substantially all of the risks and rewards of the transferred assets, such as prepayment, credit, price, interest rate and foreign exchange risks.

Transferred financial assets derecognized

Government relief programs

To support our clients through unprecedented times due to the COVID-19 pandemic, we are participating in government relief programs in Canada and in the U.S.

Under the Canadian Emergency Business Account program, we have provided interest-free loans to existing eligible small business clients funded by the Export Development Bank of Canada (EDC). As we do not retain substantially all of the risks and rewards of the financial assets, and all cash flows are passed through to the EDC, these loans are not recognized on our Consolidated Balance Sheets. The application window for the CEBA program closed on June 30, 2021.

Transferred financial assets not derecognized

Securitization of Canadian residential mortgage loans

We periodically securitize insured Canadian residential mortgage loans through the creation of MBS pools under the National Housing Act MBS (NHA MBS) program. All loans securitized under the NHA MBS program are required to be insured by the Canadian Mortgage and Housing Corporation or a third-party insurer. We require the borrower to pay for mortgage insurance when the loan amount is greater than 80% of the original appraised value of the property (LTV ratio). For residential mortgage loans securitized under this program with LTV ratios less than 80%, we are required to insure the mortgages at our own expense. Under the NHA MBS program, we are responsible for making all payments due on our issued MBS, regardless of whether we collect the necessary funds from the mortgagor or the insurer. When a borrower defaults on a mortgage, we submit a claim to the insurer if the amount recovered from the collection or foreclosure process is lower than the sum of the principal balance, accrued interest and collection costs on the outstanding loan.

The insurance claim process is managed by the insurance provider in accordance with the insurer’s policies and covers the entire unpaid loan balance plus generally up to 12 months of interest, selling costs and other eligible expenses. If an insurance claim is denied, a loss is recognized in Provision for credit losses in our Consolidated Statements of Income. The amount recorded as a loss is not significant to our

Consolidated Financial Statements and no significant losses were incurred due to legal action arising from mortgage defaults during 2021 and 2020 .

We sell the NHA MBS pools primarily to a government-sponsored structured entity under the Canada Mortgage Bond (CMB) program. The entity periodically issues CMBs, which are guaranteed by the government, and sells them to third-party investors. Proceeds of the CMB issuances are used by the entity to purchase the NHA MBS pools from eligible NHA MBS issuers who participate in the issuance of a particular CMB series. Our continuing involvement includes servicing the underlying residential mortgage loans we have securitized, either ourselves or through a third-party servicer. We also act as counterparty in interest rate swap agreements where we pay the entity the interest due to CMB investors and receive the interest on the underlying MBS and reinvested assets. As part of the swaps, we are also required to maintain a principal reinvestment account for principal payments received on the underlying mortgage loans to meet the repayment obligation upon maturity of the CMB. We reinvest the collected principal payments in permitted inv e stments as outlined in the swap agreements.

We have determined that certain of the NHA MBS program loans transferred to the entity do not qualify for derecognition as we have not transferred substantially all of the risks and rewards of ownership. As a result, these transferred MBS continue to be classified as residential mortgage loans and recognized on our Consolidated Balance Sheets. The cash received for these transferred MBS is treated as a secured borrowing and a corresponding liability is recorded in Deposits – Business and government on our Consolidated Balance Sheets.

Consolidated Financial Statements Royal Bank of Canada: Annual Report 2021 177

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Note 6 Derecognition of financial assets<br><br>(continued)

Securities sold under repurchase agreements and securities loaned

We also enter into transactions such as repurchase agreements and securities lending agreements where we transfer assets under agreements to repurchase them at a future date and retain substantially all of the risks and rewards associated with the assets. These transferred assets remain on our Consolidated Balance Sheets and are accounted for as collateralized borrowing transactions.

The following table provides information on the carrying amount and fair value of the transferred assets that did not qualify for derecognition, and their associated liabilities.

	As at
	October 31, 2021								October 31, 2020
(Millions of Canadian dollars)	Canadian<br> residential<br> mortgage<br> loans<br><br>(1), (2)		Securities<br> sold under<br> repurchase<br> agreements<br><br>(3)		Securities<br> loaned<br><br>(3)		Total		Canadian<br> residential<br> mortgage<br> loans <br>(1), (2)			Securities<br> sold under<br> repurchase<br> agreements <br>(3)		Securities<br> loaned <br>(3)		Total
Carrying amount of transferred assets that do not qualify for derecognition	$	34,052	$	252,920	$	9,281	$	296,253	$	35,001		$	267,361	$	6,870	$	309,232
Carrying amount of associated liabilities		33,769		252,920		9,281		295,970		34,805			267,361		6,870		309,036
Fair value of transferred assets	$	34,142	$	252,920	$	9,281	$	296,343	$	35,293		$	267,361	$	6,870	$	309,524
Fair value of associated liabilities		34,073		252,920		9,281		296,274		35,957			267,361		6,870		310,188
Fair value of net position	$	69	$	–	$	–	$	69	$	(664	)	$	–	$	–	$	(664	)
(1)	Includes Canadian residential mortgage loans transferred primarily to Canada Housing Trust at the initial securitization and other permitted investments used for funding requirements after the initial securitization.
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(2)	CMB investors have legal recourse only to the transferred assets, and do not have recourse to our general assets.
---	---
(3)	Does not include over-collateralization of assets pledged.
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Note 7 Structured entities
---

In the normal course of business, we engage in a variety of financial transactions with structured entities to support our financing and investing needs as well as those of our customers. A structured entity is an entity in which voting or similar rights are not the dominant factor in deciding control. Structured entities are generally created to achieve a narrow and well defined objective with restrictions around their ongoing activities. We consolidate a structured entity when we control the entity in accordance with our accounting policy as described in Note 2. In other cases, we may sponsor or have an interest in such an entity but may not consolidate it.

Consolidated structured entities

We consolidate the following structured entities, whose assets and liabilities are recorded on our Consolidated Balance Sheets. Third-party investors in these structured entities generally have recourse only to the assets of the related entity and do not have recourse to our general assets unless we breach our contractual obligations to those entities. In the ordinary course of business, the assets of each consolidated structured entity can generally only be used to settle the obligations of that entity.

RBC-administered multi-seller conduits

We generally do not maintain ownership in the multi-seller conduits that we administer and generally do not have rights to, or control of, their assets. However, we issue asset-backed commercial paper (ABCP) through a multi-seller conduit that does not have a first loss investor with substantive power to direct the significant operating activities of the conduit. This conduit is consolidated because we have exposure to variability of returns from performance in the multi-seller arrangements through providing transaction-specific and program-wide liquidity, credit and loan facilities to the conduit and have decision-making power over the relevant activities. As of October 31, 2021, $1,076 m illion of financial assets held by the conduit was included in Loans (October 31, 2020 – $957 m illion) and $665 m illion of ABCP issued by the conduit was included in Deposits (October 31, 2020 – $558 m illion) on our Consolidated Balance Sheets.

Credit card securitization vehicle

We securitize a portion of our credit card receivables through a structured entity on a revolving basis. The entity purchases co-ownership interests in a pool of credit card receivables and issues senior and subordinated term notes collateralized by that co-ownership interest in the underlying pool of credit card receivables. Investors who purchase the term notes have recourse only to that co-ownership interest in the underlying pool of credit card receivables.

We continue to service the credit card receivables and perform an administrative role for the entity. We also retain risk in the underlying pool of credit card receivables through our retained interest in the transferred assets, the cash reserve balance we fund from time to time, and also through certain subordinated notes which we retain. Additionally, we may own some senior notes as investments or for market-making activities and we act as counterparty to interest rate and cross currency swap agreements which hedge the entity’s interest rate and currency risk exposure. We have also provided subordinated loans to the entity to pay upfront expenses; the loans were fully repaid during the year ended October 31, 2021.

We consolidate the structured entity because we have decision-making power over the timing and size of future issuances and other relevant activities which were predetermined by us at inception. We also obtain significant funding benefits and are exposed to variability from the performance of the underlying credit card receivables through our retained interest. As at October 31, 2021, $3 billion of notes issued by our credit card securitization vehicle were included in Deposits on our Consolidated Balance Sheets (October 31, 2020 – $6 billion).

178 Royal Bank of Canada: Annual Report 2021 Consolidated Financial Statements

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Collateralized commercial paper vehicle

We established a funding vehicle that provides loans to us and finances those loans by issuing commercial paper to third-party investors. The structured entity’s commercial paper carries an equivalent credit rating to RBC because we are obligated to advance funds to the entity in the event there are insufficient funds from other sources to settle maturing commercial paper. We pledge collateral to secure the loans and are exposed to the market and credit risks of the pledged securities.

We consolidate the structured entity because we have decision-making power over the relevant activities, are the sole borrower from the structure, and are exposed to a majority of the residual ownership risks through the credit support provided. As at October 31, 2021, $13 billion of commercial paper issued by the vehicle was included in Deposits on our Consolidated Balance Sheets (October 31, 2020 – $12 billion).

Covered bonds

We periodically transfer mortgages to RBC Covered Bond Guarantor Limited Partnership (the Guarantor LP) to support funding activities and asset coverage requirements under our covered bonds program. The Guarantor LP was created to guarantee interest and principal payments under the covered bond program. The covered bonds guaranteed by the Guarantor LP are direct, unsecured and unconditional obligations of RBC; therefore, investors have a claim against the Bank which will continue if the covered bonds are not paid by the Bank and the mortgage assets in the Guarantor LP are insufficient to satisfy the obligations owing on the covered bonds. We act as general partner, limited partner, swap counterparty, lender and liquidity provider to the Guarantor LP, servicer for the underlying mortgages as well as the registered issuer of the covered bonds.

We consolidate the Guarantor LP as we have the decision-making power over the relevant activities through our role as general partner and are exposed to variability from the performance of the underlying mortgages. As at October 31, 2021, the total amount of mortgages transferred and outstanding was $80 billion (October 31, 2020 – $106 billion) and $37 billion of covered bonds were recorded as Deposits on our Consolidated Balance Sheets (October 31, 2020 – $40 billion).

Municipal bond TOB structures

We sell taxable and tax-exempt municipal bonds into Tender Option Bond (TOB) structures, which consist of a bond that is credit enhanced by us and purchased by a TOB trust. The TOB trust finances the purchase from us by issuing floating-rate certificates to short-term investors and a residual certificate that is purchased by us. We are the remarketing agent for the floating-rate certificates and provide a liquidity facility to the short-term investors which requires us to purchase any certificates tendered but not successfully remarketed. We credit enhance the bond purchased by the TOB trust with a letter of credit under which we are required to extend funding if there are any losses on the underlying bonds. We earn interest on the residual certificate and receive market-based fees for acting as remarketing agent and providing the liquidity facility and letter of credit.

We consolidate the TOB trust when we are the holder of the residual certificate as we have decision-making power over the relevant activities, including the selection of the underlying municipal bonds and the ability to terminate the structure, and are exposed to variability from the performance of the underlying municipal bonds. As at October 31, 2021, $7 billion of municipal bonds were included in Investment securities related to consolidated TOB structures (October 31, 2020 – $8 billion) and a corresponding $7 billion of floating-rate certificates were included in Deposits on our Consolidated Balance Sheets (October 31, 2020 – $8 billion).

RBC managed investment funds

We are sponsors and investment managers of mutual and pooled funds, which give us the ability to direct the investment decisions of the funds. We consolidate those mutual and pooled funds in which our interests, which include direct investment in seed capital plus management or performance fees, indicate that we are acting as a principal. As at October 31, 2021, $514 million of Trading securities held in the consolidated funds (October 31, 2020 – $516 million) and $365 million of Other liabilities representing the fund units held by third parties (October 31, 2020 – $293 million) were recorded on our Consolidated Balance Sheets.

Unconsolidated structured entities

We have interests in certain structured entities that we do not consolidate but have recorded assets and liabilities on our Consolidated Balance Sheets related to our transactions and involvement with these entities.

The following table presents the assets and liabilities recorded on our Consolidated Balance Sheets and our maximum exposure to loss related to our interests in unconsolidated structured entities. It also presents the size of each class of unconsolidated structured entity, as measured by the total assets of the entities in which we have an interest.

	As at October 31, 2021
(Millions of Canadian dollars)	Multi-seller<br> conduits<br><br>(1)		Structured<br> finance		Non-RBC<br><br> managed<br> investment<br> funds		Third-party<br> securitization<br> vehicles		Other		Total
On-balance<br> sheet assets
Securities	$	12	$	–	$	3,047	$	–	$	537	$	3,596
Loans		–		4,569		–		6,855		1,453		12,877
Derivatives		17		–		–		–		108		125
Other assets		–		27		–		–		363		390
	$	29	$	4,596	$	3,047	$	6,855	$	2,461	$	16,988
On-balance<br> sheet liabilities
Derivatives	$	93	$	–	$	–	$	–	$	–	$	93
Other liabilities		–		–		–		–		–		–
	$	93	$	–	$	–	$	–	$	–	$	93
Maximum exposure to loss <br>(2)	$	40,893	$	8,361	$	3,651	$	12,214	$	4,057	$	69,176
Total assets of unconsolidated structured entities	$	40,074	$	19,881	$	506,699	$	80,458	$	392,348	$	1,039,460

Consolidated Financial Statements Royal Bank of Canada: Annual Report 2021 179

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Note 7 Structured entities<br><br>(continued)
	As at October 31, 2020
---	---	---	---	---	---	---	---	---	---	---	---	---
(Millions of Canadian dollars)	Multi-seller<br> conduits <br>(1)		Structured<br> <br>finance		Non-RBC<br><br> managed<br> investment<br> funds		Third-party<br> securitization<br> vehicles		Other		Total
On-balance<br> sheet assets
Securities	$	138	$	–	$	2,297	$	–	$	422	$	2,857
Loans		–		2,670		–		5,628		931		9,229
Derivatives		60		–		–		–		84		144
Other assets		–		46		–		–		261		307
	$	198	$	2,716	$	2,297	$	5,628	$	1,698	$	12,537
On-balance<br> sheet liabilities
Derivatives	$	38	$	–	$	–	$	–	$	–	$	38
Other liabilities		–		–		–		–		–		–
	$	38	$	–	$	–	$	–	$	–	$	38
Maximum exposure to loss <br>(2)	$	42,863	$	6,522	$	2,557	$	10,389	$	2,108	$	64,439
Total assets of unconsolidated structured entities	$	41,964	$	18,200	$	462,947	$	87,631	$	286,200	$	896,942
(1)	Total assets of unconsolidated structured entities represent the maximum assets that may have to be purchased by the conduits under purchase commitments outstanding. Of the purchase commitments outstanding, the conduits have purchased financial assets totalling $25 billion as at October 31, 2021 (October 31, 2020 – $23 billion).
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(2)	The maximum exposure to loss resulting from our interests in these entities consists mostly of investments, loans, fair value of derivatives, liquidity and credit enhancement facilities. The maximum exposure to loss of the multi-seller conduits is higher than the <br>on-balance<br> sheet assets primarily because of the notional amounts of the backstop liquidity and credit enhancement facilities. Refer to Note 23.
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Below is a description of our involvement with each significant class of unconsolidated structured entity.

Multi-seller conduits

We administer multi-seller ABCP conduit programs. Multi-seller conduits primarily purchase financial assets from clients and finance those purchases by issuing ABCP.

In certain multi-seller conduit arrangements, we do not maintain any ownership of the multi-seller conduits that we administer and have no rights to, or control of, its assets. As the administrative agent, we earn a residual fee for providing services such as coordinating funding activities, transaction structuring, documentation, execution and monitoring. The ABCP issued by each multi-seller conduit is in the conduit’s own name with recourse to the financial assets owned by the multi-seller conduit, and is non-recourse to us except through our participation in liquidity and/or credit enhancement facilities.

We provide transaction-specific and program-wide liquidity facilities to the multi-seller conduits. In addition, we provide program-wide credit enhancement to the multi-seller conduits which obligate us to purchase assets or advance funds in the event the multi-seller conduit does not otherwise have funds from other sources, such as from the liquidity facilities, to settle maturing ABCP. In some cases, we or another third party may provide transaction-specific credit enhancement which can take various forms. We receive market-based fees for providing these liquidity and credit facilities.

For certain transactions, we act as counterparty to various hedging contracts to facilitate our clients’ securitization of fixed rate and/or foreign currency denominated assets through the conduits. These may take the form of forward contracts, interest rate swaps or cross currency swaps. These derivatives expose us to foreign exchange and interest rate risks that are centrally managed by our foreign exchange trading and swap desks, respectively, and credit risk on the underlying assets that is mitigated by the credit enhancement described below.

Each transaction is structured with transaction-specific first loss protection provided by the third-party seller. This enhancement can take various forms, including but not limited to overcollateralization, excess spread, subordinated classes of financial assets, guarantees or letters of credit. The amount of this enhancement varies but is generally designed to cover a multiple of historical losses.

An unrelated third party (expected loss investor) absorbs losses, up to a maximum contractual amount, that may occur in the future on the assets in the multi-seller conduits before the multi-seller conduits’ debt holders and us. In return for assuming this multi-seller conduit first-loss position, each multi-seller conduit pays the expected loss investor a return commensurate with its risk position. The expected loss investor has substantive power to direct the majority of the activities which significantly impact the conduit’s economic performance, including initial selection and approval of the asset purchase commitments and liquidity facilities, approval of renewal and amendment of these transactions and facilities, sale or transfer of assets, ongoing monitoring of asset performance, mitigation of losses, and management of the ABCP liabilities.

We do not consolidate these multi-seller conduits as we do not control the conduit s as noted above.

Structured finance

We participate in certain municipal bond TOB structures that we do not consolidate. These structures are similar to those consolidated municipal bond TOB structures described above; however, the residual certificates are held by third parties. We provide liquidity facilities for the benefit of floating-rate certificate holders which may be drawn if certificates are tendered but not able to be remarketed. For a portion of these trusts, we also provide a letter of credit for the underlying bonds held in the trust. We do not have decision-making power over the relevant activities of the structures; therefore, we do not consolidate these structures.

We provide senior warehouse financing to structured entities that are established by third parties to acquire loans for the purposes of issuing a term collateralized loan obligation (CLO) transaction. Subordinated financing is provided during the

180 Royal Bank of Canada: Annual Report 2021 Consolidated Financial Statements

Table of Contents

warehouse phase by one or more third-party equity investors. We act as the arranger and placement agent for the term CLO transaction. Proceeds from the sale of the term CLO are used to repay our senior warehouse financing, at which point we have no further involvement with the transaction. We do not consolidate these CLO structures as we do not have decision-making power over the relevant activities of the entity, which include the initial selection and subsequent management of the underlying debt portfolio.

We provide senior financing to unaffiliated structured entities that are established by third parties to acquire loans. These facilities tend to be longer in term than the CLO warehouse facilities and benefit from credit enhancement generally designed to cover a multiple of historical losses. We do not consolidate these structures as we do not have decision-making power over the relevant activities of the entity, which include the initial selection and subsequent management of the underlying debt portfolio.

Non-RBC managed investment funds

We enter into fee-based equity derivative transactions with third parties including mutual funds, unit investment trusts and other investment funds. These transactions provide their investors with the desired exposure to a reference fund, and we economically hedge our exposure to these derivatives by investing in those reference funds. We also act as custodian or administrator for several funds. We do not consolidate those reference funds that are managed by third parties as we do not have power to direct their investing activities.

We provide liquidity facilities to certain third-party investment funds. The funds issue unsecured variable-rate preferred shares and invest in portfolios of tax-exempt municipal bonds. Undrawn liquidity commitments expose us to the liquidity risk of the preferred shares and drawn commitments expose us to the credit risk of the underlying municipal bonds. We do not consolidate these third-party managed funds as we do not have power to direct their investing activities.

Third-party securitization vehicles

We hold interests in securitization vehicles that provide funding to certain third parties on whose behalf the entities were created. The activities of these entities are limited to the purchase and sale of specified financial assets from the sponsor. We, as well as other financial institutions, are obligated to provide funding up to our maximum commitment level and are exposed to credit losses on the underlying assets after various credit enhancements. Enhancements can take various forms, including but not limited to overcollateralization, excess spread, subordinated classes of financial assets, guarantees or letters of credit. The amount of this enhancement varies but is generally designed to cover a multiple of historical losses. We do not consolidate these entities as we do not have decision-making power over the relevant activities, including the entities’ investing and financing activities.

Other

Other unconsolidated structured entities include managed investment funds, credit investment products and tax credit funds.

We are sponsors and investment managers of mutual and pooled funds, which gives us the ability to direct the investment decisions of the funds. We do not consolidate those mutual and pooled funds if we exercise our decision-making power as an agent on behalf of other unit holders.

We use structured entities to generally transform credit derivatives into cash instruments, to distribute credit risk and to create customized credit products to meet investors’ specific requirements. We enter into derivative contracts, including credit derivatives, to purchase protection from these entities (credit protection) and convert various risk factors such as yield, currency or credit risk of underlying assets to meet the needs of the investors. We act as sole arranger and swap provider for certain entities and, in some cases, fulfill other administrative functions for the entities. We do not consolidate these credit investment product entities as we do not have decision-making power over the relevant activities, which include selection of the collateral and reference portfolio, and are not exposed to a majority of the benefits or risks of the entities.

We created certain funds to pass through tax credits received from underlying low-income housing, historic rehabilitation real estate projects to third parties, new market tax credits or renewable energy tax credits to third parties (tax credit funds). We are sponsors of the tax credit funds as a result of our responsibility to manage the funds, arrange the financing, and perform the administrative duties of these tax credit funds. We do not consolidate the tax credit funds as the third-party investors in these funds have the decision-making power to select the underlying investments and are exposed to the majority of the residual ownership and tax risks of the funds.

We also purchase passive interests in renewable energy tax credit entities created and controlled by third parties. We do not consolidate these third-party funds as we do not have decision-making power over the relevant activities and our investments are managed as part of larger portfolios which are held for trading purposes.

Other interests in unconsolidated structured entities

In the normal course of business, we buy and sell passive interests in certain third-party structured entities, including mutual funds, exchange traded funds, and government-sponsored ABS vehicles. Our investments in these entities are managed as part of larger portfolios which are held for trading, liquidity or hedging purposes. We did not create or sponsor these entities and do not have any decision-making power over their ongoing activities. Our maximum exposure to loss is limited to our on-balance sheet investments in these entities, which are not included in the table above. As at October 31, 2021 and 2020, our investments in these entities were included in Trading and Investment securities on our Consolidated Balance Sheets. Refer to Note 3 and Note 4 for further details on our Trading and Investment securities.

	As at October 31, 2021
	Term to maturity
(Millions of Canadian dollars)	Within<br> 1 year		1 through<br> 5 years		Over<br> 5 years		Total		Trading		Other than<br> Trading
Over-the-counter<br> contracts
Interest rate contracts
Forward rate agreements	$	866,704	$	161,835	$	158	$	1,028,697	$	1,015,263	$	13,434
Swaps		3,936,638		6,559,032		4,268,243		14,763,913		14,259,757		504,156
Options purchased		266,798		312,149		185,547		764,494		764,494		–
Options written		271,000		309,540		203,665		784,205		784,205		–
Foreign exchange contracts
Forward contracts		1,730,712		56,335		2,491		1,789,538		1,753,075		36,463
Cross currency swaps		82,316		57,968		72,864		213,148		204,789		8,359
Cross currency interest rate swaps		439,169		1,193,669		776,062		2,408,900		2,376,225		32,675
Options purchased		46,060		16,097		3,059		65,216		65,216		–
Options written		53,342		16,122		3,060		72,524		72,524		–
Credit derivatives <br>(2)		1,027		35,759		6,125		42,911		42,428		483
Other contracts <br>(3)		218,270		98,850		20,757		337,877		325,226		12,651
Exchange-traded contracts
Interest rate contracts
Futures – long positions		110,285		148,262		333		258,880		256,020		2,860
Futures – short positions		173,039		97,364		126		270,529		270,129		400
Options purchased		28,071		15,250		–		43,321		43,321		–
Options written		22,272		1,300		–		23,572		23,572		–
Foreign exchange contracts
Futures – long positions		129		–		–		129		129		–
Other contracts		391,339		84,135		1,175		476,649		476,649		–
	$	8,637,171	$	9,163,667	$	5,543,665	$	23,344,503	$	22,733,022	$	611,481
	As at October 31, 2020
	Term to maturity
(Millions of Canadian dollars)	Within<br> 1 year		1 through<br> 5 years		Over<br> 5 years		Total		Trading		Other than<br> Trading
Over-the-counter<br> contracts
Interest rate contracts
Forward rate agreements	$	2,782,447	$	427,464	$	340	$	3,210,251	$	3,172,950	$	37,301
Swaps		3,409,078		5,990,160		3,755,593		13,154,831		12,685,595		469,236
Options purchased		282,837		407,782		185,667		876,286		876,153		133
Options written		303,347		410,237		198,222		911,806		911,806		–
Foreign exchange contracts
Forward contracts		1,691,079		32,474		1,788		1,725,341		1,707,082		18,259
Cross currency swaps		80,186		56,563		64,540		201,289		194,773		6,516
Cross currency interest rate swaps		412,053		1,117,048		633,023		2,162,124		2,112,625		49,499
Options purchased		46,719		13,963		3,349		64,031		64,031		–
Options written		50,099		13,407		3,410		66,916		66,916		–
Credit derivatives <br>(2)		1,309		39,877		7,577		48,763		48,244		519
Other contracts <br>(3)		177,220		94,378		20,126		291,724		282,321		9,403
Exchange-traded contracts
Interest rate contracts
Futures – long positions		164,925		112,363		113		277,401		277,401		–
Futures – short positions		205,927		167,350		233		373,510		373,510		–
Options purchased		74,494		14,188		–		88,682		88,682		–
Options written		58,116		10,391		–		68,507		68,507		–
Foreign exchange contracts
Futures – long positions		75		–		–		75		75		–
Other contracts		179,681		30,768		240		210,689		210,689		–
	$	9,919,592	$	8,938,413	$	4,874,221	$	23,732,226	$	23,141,360	$	590,866
(1)	The derivative notional amounts are determined using the standardized approach for measuring counterparty credit risk <br>(SA-CCR)<br> in accordance with the Capital Adequacy Requirements (CAR).
---	---
(2)	Credit derivatives with a notional value of $1 billion (October 31, 2020 – $1 billion) are economic hedges. Trading credit derivatives comprise protection purchased of $25 billion (October 31, 2020 – $26 billion) and protection sold of $17 billion (October 31, 2020 – $22 billion).
---	---
(3)	Other contracts exclude loan-related commitment derivatives of $9 billion (October 31, 2020 – $2 billion), which are not classified as derivatives under CAR guidelines.
---	---


		October 31, 2020 <br>(2)
(Millions of Canadian dollars)		Notional/Principal<br> amounts
Interest rate contracts
LIBOR	38,730	$	22,640
LIBOR	290		591
Non-derivative instruments
LIBOR	215		231
LIBOR	–		691
	39,235	$	24,153

(1)	Excludes interest rate contracts and <br>non-derivative<br> instruments which reference rates in multi-rate jurisdictions, including CDOR, EURO Interbank Offered Rate and Australian Bank Bill Swap Rate (BBSW).
(2)	Amounts have been <br>updated<br> from those previously presented to reflect the regulatory developments related to the USD LIBOR cessation date.
---	---

	As at October 31, 2021
	Risk rating<br><br>(1)										Counterparty type<br><br>(2)
(Millions of Canadian dollars)	AAA, AA		A		BBB		BB or lower		Total		Banks		OECD<br> governments		Other		Total
Gross positive <br>fair values	$	22,801	$	37,938	$	16,333	$	19,593	$	96,665	$	42,361	$	15,964	$	38,340	$	96,665
Impact of master netting agreements and applicable margins		20,545		33,257		12,050		9,869		75,721		41,554		15,731		18,436		75,721
Replacement cost (after netting agreements)	$	2,256	$	4,681	$	4,283	$	9,724	$	20,944	$	807	$	233	$	19,904	$	20,944
	As at October 31, 2020
	Risk rating <br>(1)										Counterparty type <br>(2)
(Millions of Canadian dollars)	AAA, AA		A		BBB		BB or lower		Total		Banks		OECD<br> governments		Other		Total
Gross positive <br>fair values	$	30,097	$	44,736	$	18,392	$	22,024	$	115,249	$	49,146	$	22,109	$	43,994	$	115,249
Impact of master netting agreements and applicable margins		27,110		40,359		14,238		13,457		95,164		48,291		21,534		25,339		95,164
Replacement cost (after netting agreements)	$	2,987	$	4,377	$	4,154	$	8,567	$	20,085	$	855	$	575	$	18,655	$	20,085
(1)	Our internal risk ratings of AAA, AA, A and BBB represent investment grade ratings and ratings of BB or lower represent <br>non-investment<br> grade ratings, as outlined in the internal ratings maps in the Credit risk section of Management’s Discussion and Analysis.
---	---
(2)	Counterparty type is defined in accordance with CAR guidelines.
---	---

•	Mismatches in the terms of hedged items and hedging instruments, for example the frequency and timing of when interest rates are reset and frequency of payment.
•	Difference in the discounting factors between the hedged item and the hedging instrument, taking into consideration the different reset frequency of the hedged item and hedging instrument.
---	---
•	Hedging derivatives with a <br>non-zero<br> fair value at inception date of the hedging relationship, resulting in mismatch in terms with the hedged item.
---	---

	As at
	October 31, 2021									October 31, 2020
	Designated as hedging instruments<br> in hedging relationships						Not designated<br> <br>in a hedging<br> <br>relationship			Designated as hedging instruments<br> in hedging relationships								Not designated<br> <br>in a hedging<br> <br>relationship
(Millions of Canadian dollars)	Fair value		Cash flow		Net<br> investment				Fair value			Cash flow			Net<br> investment
Assets
Derivative instruments	$	66	$	9	$	98	$	95,368		$	102		$	1		$	19	$	113,366
Liabilities
Derivative instruments		131		20		18		91,270			298			30			58		109,541
Non-derivative<br> instruments		–		–		27,157		n.a.			–			–			28,702		n.a.
(1)	The fair value reflects the impact of the election to characterize the daily variation margin as settlement of the related derivative fair values as permitted by certain central counterparties.
---	---
n.a.	not applicable
---	---

	As at October 31, 2021
	Notional amounts								Carrying amount<br><br>(1)
(Millions of Canadian dollars, except average rates)	Within<br> <br>1 year		1 through<br> <br>5 years		Over<br> <br>5 years		Total		Assets		Liabilities
Interest rate risk
Interest rate contracts
Hedge of fixed rate assets	$	10,503	$	25,008	$	6,568	$	42,079	$	19	$	116
Hedge of fixed rate liabilities		8,939		44,870		11,646		65,455		47		15
Weighted average fixed interest rate
Hedge of fixed rate assets		0.8%		0.7%		1.9%		0.9%
Hedge of fixed rate liabilities		1.5%		1.2%		1.5%		1.3%
	As at October 31, 2020
---	---	---	---	---	---	---	---	---	---	---	---	---
	Notional amounts								Carrying amount<br>(1)
(Millions of Canadian dollars, except average rates)	Within<br> <br>1 year		1 through<br> <br>5 years		Over<br> <br>5 years		Total		Assets		Liabilities
Interest rate risk
Interest rate contracts
Hedge of fixed rate assets	$	14,410	$	28,182	$	6,709	$	49,301	$	1	$	298
Hedge of fixed rate liabilities		21,207		38,704		6,415		66,326		101		–
Weighted average fixed interest rate
Hedge of fixed rate assets		1.5%		1.0%		2.0%		1.3%
Hedge of fixed rate liabilities		1.7%		1.4%		1.8%		1.6%
(1)	The carrying value reflects the impact of the election to characterize the daily variation margin as settlement of the related derivative fair values as permitted by certain central counterparties.
---	---


								Carrying amount (1)
(Millions of Canadian dollars, except average rates)		1 through<br> <br>5 years		Over<br> <br>5 years		Total		Assets		Liabilities
Interest rate risk
Interest rate contracts
Hedge of variable rate assets	15,309	$	10,663	$	1,762	$	27,734	$	–	$	–
Hedge of variable rate liabilities	5,616		61,697		5,384		72,697		–		–
Weighted average fixed interest rate
Hedge of variable rate assets	0.6%		1.4%		1.8%		1.0%
Hedge of variable rate liabilities	1.9%		1.5%		1.4%		1.5%
Foreign exchange risk
Cross currency swaps	700	$	160	$	–	$	860	$	1	$	2
Weighted average CAD- exchange rate	0.01		n.a.		n.a.		0.01
Weighted average CAD- exchange rate	n.a.		1.52		n.a.		1.52


								Carrying amount
(Millions of Canadian dollars, except average rates)		1 through<br> <br>5 years		Over<br> <br>5 years		Total		Assets		Liabilities
Foreign exchange risk
Foreign currency liabilities	433	$	26,294	$	401	$	27,128		n.a.	$	27,157
Weighted average CAD- exchange rate	1.32		1.29		1.30		1.29
Weighted average CAD- exchange rate	–		1.51		1.48		1.51
Weighted average CAD- exchange rate	–		1.72		–		1.72
Forward contracts	4,951	$	–	$	–	$	4,951	$	98	$	18
Weighted average CAD- exchange rate	1.26		n.a.		n.a.		1.26
Weighted average CAD- exchange rate	1.45		n.a.		n.a.		1.45
Weighted average CAD- exchange rate	1.73		n.a.		n.a.		1.73

	As at and for the year ended October 31, 2021
	Carrying amount				Accumulated amount of fair<br> value adjustments on the<br> hedged item included in the<br> carrying amount
(Millions of Canadian dollars)	Assets		Liabilities		Assets			Liabilities			Balance sheet items:	Changes in fair<br> values used for<br> calculating hedge<br> ineffectiveness
Interest rate risk
Fixed rate assets <br>(1)	$	42,810	$	–	$	(78	)	$	–		Securities – Investment, net of<br> <br>applicable allowance; Loans – Retail;<br> <br>Loans – Wholesale	$	(1,027	)
Fixed rate liabilities<br>(1)		–		65,355		–			(59	)	Deposits – Business and government; Subordinated debentures		1,842
	As at and for the year ended October 31, 2020
---	---	---	---	---	---	---	---	---	---	---	---	---
	Carrying amount				Accumulated amount of fair<br> <br>value adjustments on the<br> <br>hedged item included in the<br> carrying amount
(Millions of Canadian dollars)	Assets		Liabilities		Assets		Liabilities		Balance sheet items:	Changes in fair<br> values used for<br> calculating hedge<br> ineffectiveness
Interest rate risk
Fixed rate assets<br>(1)	$	49,272	$	–	$	1,058	$	–	Securities – Investment, net of<br> <br>applicable allowance; Loans – Retail; Loans – Wholesale	$	879
Fixed rate liabilities<br>(1)		–		68,130		–		1,817	Deposits – Business and government; Subordinated debentures		(1,142	)
(1)	As at October 31, 2021, the accumulated amount of fair value hedge adjustments remaining in the Balance Sheet for hedged items that have ceased to be adjusted for hedging gains and losses is a gain of $125 million for fixed-rate assets and a loss of $62 million for fixed-rate liabilities (October 31, 2020 – gain of $32 million and loss of $94 million, respectively).
---	---

	As at and for the year ended October 31, 2021
	Balance sheet items:	Changes in fair<br> values used for<br> calculating hedge<br> ineffectiveness				Cash flow hedge/foreign<br> <br>currency translation reserve
(Millions of Canadian dollars)					Continuing hedges				Discontinued<br> <br>hedges
Cash flow hedges
Interest rate risk
Variable rate assets	Securities – Investment, net of applicable allowance; Loans – Retail	$	614			$	(402	)		$	206
Variable rate liabilities	Deposits – Business and government; Deposits – Personal		(2,641	)			1,310				(399	)
Foreign exchange risk
Fixed rate assets	Securities – Investment, net of applicable allowance; Loans – Retail		(98	)			1				–
Fixed rate liabilities	Deposits – Business and government		–				–				–
Net investment hedges
Foreign exchange risk
Foreign subsidiaries	n.a.		(2,331	)			(4,032	)			(421	)
	As at and for the year ended October 31, 2020
---	---	---	---	---	---	---	---	---	---	---	---	---
	Balance sheet items:	Changes in fair<br> values used for<br> calculating hedge<br> ineffectiveness				Cash flow hedge/foreign<br> <br>currency translation reserve
(Millions of Canadian dollars)					Continuing hedges				Discontinued<br> <br>hedges
Cash flow hedges
Interest rate risk
Variable rate assets	Securities – Investment, net of applicable allowance; Loans – Retail	$	(484	)		$	294			$	285
Variable rate liabilities	Deposits – Business and government; Deposits – Personal		1,839				(1,540	)			(523	)
Foreign exchange risk
Fixed rate assets	Securities – Investment, net of applicable allowance; Loans – Retail		2				6				–
Fixed rate liabilities	Deposits – Business and government		(164	)			–				–
Net investment hedges
Foreign exchange risk
Foreign subsidiaries	n.a.		535				(6,363	)			(421	)
n.a.	not applicable
---	---

	For the year ended October 31, 2021
(Millions of Canadian dollars)	Change in fair value<br> of hedging<br> instrument			Hedge<br> ineffectiveness<br> recognized in<br> income<br><br>(1)			Changes in the value of<br> the hedging instrument<br> recognized in OCI			Amount reclassified<br> from hedge reserves<br> to income
Fair value hedges
Interest rate risk
Interest rate contracts – fixed rate assets	$	929		$	(98	)		n.a.			n.a.
Interest rate contracts – fixed rate liabilities		(1,802	)		40			n.a.			n.a.
Cash flow hedges
Interest rate risk
Interest rate contracts – variable rate assets		(631	)		(17	)	$	(497	)	$	279
Interest rate contracts – variable rate liabilities		2,579			9			1,949			(1,024	)
Foreign exchange risk
Cross currency swap – fixed rate assets		98			–			98			103
Cross currency swap – fixed rate liabilities		–			–			–			–
Net investment hedges
Foreign exchange risk
Foreign currency liabilities		1,882			–			1,882			–
Forward contracts		449			–			449			1

	For the year ended October 31, 2020
(Millions of Canadian dollars)	Change in fair value<br> <br>of hedging<br> <br>instrument			Hedge<br> <br>ineffectiveness<br> <br>recognized in<br> <br>income<br>(1)			Changes in the value of<br> <br>the hedging instrument<br> <br>recognized in OCI			Amount reclassified<br> <br>from hedge reserves<br> to income
Fair value hedges
Interest rate risk
Interest rate contracts – fixed rate assets	$	(931	)	$	(52	)		n.a.			n.a.
Interest rate contracts – fixed rate liabilities		1,157			15			n.a.			n.a.
Cash flow hedges
Interest rate risk
Interest rate contracts – variable rate assets		501			16		$	532		$	200
Interest rate contracts – variable rate liabilities		(1,803	)		1			(2,127	)		(367	)
Foreign exchange risk
Cross currency swap – fixed rate assets		(2	)		–			3			(5	)
Cross currency swap – fixed rate liabilities		164			–			113			122
Net investment hedges
Foreign exchange risk
Foreign currency liabilities		(405	)		5			(410	)		–
Forward contracts		(124	)		1			(125	)		(28	)
(1)	Hedge ineffectiveness recognized in income included losses of $101 million that are excluded from the assessment of hedge effectiveness and are offset by economic hedges (October 31, 2020 – $94 million).
---	---
n.a.	not applicable
---	---

	For the year ended October 31, 2021						For the year ended October 31, 2020
(Millions of Canadian dollars)	Cash flow hedge<br> reserve			Foreign currency<br> translation reserve			Cash flow hedge<br> <br>reserve			Foreign currency<br> <br>translation reserve
Balance at the beginning of the year	$	(1,079	)	$	4,632		$	(6	)	$	4,221
Cash flow hedges
Effective portion of changes in fair value:
Interest rate risk		1,452						(1,595	)
Foreign exchange risk		100						115
Equity price risk		306						(77	)
Net amount reclassified to profit or loss:
Ongoing hedges:
Interest rate risk		505						277
Foreign exchange risk		(105	)					(119	)
Equity price risk		(271	)					53
De-designated<br> hedges:
Interest rate risk		240						(110	)
Net gain on hedge of net investment in foreign operations
Foreign exchange denominated debt					1,882						(410	)
Forward foreign exchange contracts					449						(125	)
Foreign currency translation differences
for foreign operations					(4,308	)					813
Reclassification of losses (gains) on foreign currency translation to income					(7	)					(21	)
Reclassification of losses (gains) on net investment hedging activities to income					(1	)					28
Tax on movements on reserves during the period		(582	)		(592	)		383			126
Balance at the end of the year	$	566		$	2,055		$	(1,079	)	$	4,632

Note 9<br>Premises and equipment
	For the year ended October 31, 2021
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
	Owned by the Bank<br><br>(1)																		Right-of-use<br> lease assets
(Millions of Canadian dollars)	Land			Buildings			Computer<br> equipment			Furniture,<br> <br>fixtures<br> and other<br> <br>equipment			Leasehold<br> <br>improvements			Work in<br> <br>process			Buildings			Equipment			Total
Cost
Balance at beginning of period	$	152		$	1,416		$	2,222		$	1,684		$	3,383		$	203		$	5,171		$	421		$	14,652
Additions		1			–			28			6			94			388			379			109			1,005
Transfers from work in process		–			13			180			47			170			(410	)		–			–			–
Disposals		(2	)		(19	)		(85	)		(21	)		(70	)		(1	)		(49	)		(36	)		(283	)
Foreign exchange translation		(6	)		(20	)		(46	)		(25	)		(66	)		(5	)		(167	)		(1	)		(336	)
Other		–			29			81			(85	)		(17	)		(5	)		60			–			63
Balance at end of period	$	145		$	1,419		$	2,380		$	1,606		$	3,494		$	170		$	5,394		$	493		$	15,101
Accumulated depreciation
Balance at beginning of period	$	–		$	754		$	1,652		$	1,265		$	2,188		$	–		$	584		$	275		$	6,718
Depreciation		–			49			245			94			222			–			578			88			1,276
Disposals		–			(7	)		(83	)		(20	)		(56	)		–			(5	)		(20	)		(191	)
Foreign exchange translation		–			(9	)		(35	)		(16	)		(35	)		–			(24	)		(1	)		(120	)
Other		–			(12	)		59			(63	)		10			–			–			–			(6	)
Balance at end of period	$	–		$	775		$	1,838		$	1,260		$	2,329		$	–		$	1,133		$	342		$	7,677
Net carrying amount at end of period	$	145		$	644		$	542		$	346		$	1,165		$	170		$	4,261		$	151		$	7,424
	For the year ended October 31, 2020
	Owned by the Bank<br>(1)																		Right-of-use<br> lease assets
(Millions of Canadian dollars)	Land			Buildings			Computer<br> equipment			Furniture,<br> fixtures<br> and other<br> equipment			Leasehold<br> improvements			Work in<br> process			Buildings			Equipment			Total
Cost
Balance at beginning of period	$	153		$	1,395		$	2,062		$	1,557		$	3,001		$	432		$	4,956		$	363		$	13,919
Additions		–			26			82			42			14			623			281			115			1,183
Transfers from work in process		–			9			279			93			449			(830	)		–			–			–
Disposals		(1	)		(4	)		(157	)		(42	)		(124	)		(2	)		(58	)		(57	)		(445	)
Foreign exchange translation		1			4			7			4			10			(2	)		38			1			63
Other		(1	)		(14	)		(51	)		30			33			(18	)		(46	)		(1	)		(68	)
Balance at end of period	$	152		$	1,416		$	2,222		$	1,684		$	3,383		$	203		$	5,171		$	421		$	14,652
Accumulated depreciation
Balance at beginning of period	$	–		$	703		$	1,553		$	1,137		$	2,074		$	–		$	–		$	205		$	5,672
Depreciation		–			47			267			109			224			–			600			86			1,333
Disposals		–			(3	)		(155	)		(39	)		(112	)		–			(12	)		(16	)		(337	)
Foreign exchange translation		–			1			4			3			3			–			(2	)		–			9
Other		–			6			(17	)		55			(1	)		–			(2	)		–			41
Balance at end of period	$	–		$	754		$	1,652		$	1,265		$	2,188		$	–		$	584		$	275		$	6,718
Net carrying amount at end of period	$	152		$	662		$	570		$	419		$	1,195		$	203		$	4,587		$	146		$	7,934
(1)	As at October 31, 2021, we had total contractual commitments of $162 million to purchase premises and equipment (October 31, 2020 – $94 million).
---	---

	For the year ended October 31, 2021
(Millions of<br> Canadian dollars)	Canadian<br> Banking		Caribbean<br> Banking			Canadian<br> Wealth<br> Management			Global Asset<br> Management			U.S. Wealth<br> Management<br> (including<br> City National)			International<br> Wealth<br> Management			Insurance		Investor &<br> Treasury<br> Services			Capital<br> Markets			Total
Balance at beginning of period	$	2,557	$	1,719		$	587		$	2,001		$	2,978		$	121		$	112	$	149		$	1,078		$	11,302
Acquisitions		–		–			–			–			–			–			–		–			–			–
Dispositions		–		(3	)		–			–			–			(4	)		–		–			–			(7	)
Currency translations		–		(116	)		(10	)		(37	)		(210	)		(2	)		–		(1	)		(65	)		(441	)
Balance at end of period	$	2,557	$	1,600		$	577		$	1,964		$	2,768		$	115		$	112	$	148		$	1,013		$	10,854
	For the year ended October 31, 2020
(Millions of<br> Canadian dollars)	Canadian<br> Banking		Caribbean<br> Banking			Canadian<br> Wealth<br> Management			Global Asset<br> Management			U.S. Wealth<br> Management<br> (including<br> City National)			International<br> Wealth<br> Management			Insurance		Investor &<br> Treasury<br> Services			Capital<br> Markets			Total
Balance at beginning of period	$	2,555	$	1,727		$	579		$	1,985		$	2,943		$	120		$	112	$	148		$	1,067		$	11,236
Acquisitions		2		–			6			–			1			–			–		–			–			9
Dispositions		–		(16	)		–			–			–			–			–		–			–			(16	)
Currency translations		–		8			2			16			34			1			–		1			11			73
Balance at end of period	$	2,557	$	1,719		$	587		$	2,001		$	2,978		$	121		$	112	$	149		$	1,078		$	11,302

	As at
	August 1, 2021				August 1, 2020
	Discount<br> rate<br><br>(1)		Terminal<br> growth<br> rate		Discount<br> rate <br>(1)		Terminal<br> growth<br> rate
Group of cash generating units
Canadian Banking		9.4%		3.0%		9.5%		3.0%
Caribbean Banking		10.9		3.5		11.4		3.7
Canadian Wealth Management		10.5		3.0		10.4		3.0
Global Asset Management		10.5		3.0		10.5		3.0
U.S. Wealth Management (including City National)		11.1		3.0		10.7		3.0
International Wealth Management<br>(2)		n.m.		n.m.		n.m.		n.m.
Insurance		10.2		3.0		10.2		3.0
Investor & Treasury Services		9.9		3.0		10.2		3.0
Capital Markets		11.8		3.0		12.0		3.0
(1)	Pre-tax<br> discount rates are determined implicitly based on <br>post-tax<br> discount rates.
---	---
(2)	The recoverable amount for our International Wealth Management CGU is determined using a multiples-based approach.
---	---
n.m.	not meaningful
---	---

	For the year ended October 31, 2021
(Millions of Canadian dollars)	Internally<br> generated<br> software			Other<br> software			Core<br> deposit<br> intangibles			Customer<br> list and<br> relationships			In process<br> software			Total
Gross carrying amount
Balance at beginning of period	$	7,676		$	1,901		$	1,586		$	1,916		$	1,241		$	14,320
Additions		48			15			–			–			1,129			1,192
Acquisitions through business combinations		–			–			–			–			–			–
Transfers		1,022			69			–			–			(1,091	)		–
Dispositions		(66	)		(87	)		–			(38	)		(8	)		(199	)
Impairment losses		(157	)		–			–			–			(9	)		(166	)
Currency translations		(126	)		(60	)		(112	)		(41	)		(29	)		(368	)
Other changes		(7	)		8			–			5			3			9
Balance at end of period	$	8,390		$	1,846		$	1,474		$	1,842		$	1,236		$	14,788
Accumulated amortization
Balance at beginning of period	$	(5,884	)	$	(1,500	)	$	(793	)	$	(1,391	)	$	–		$	(9,568	)
Amortization charge for the year		(898	)		(138	)		(150	)		(101	)		–			(1,287	)
Dispositions		65			86			–			38			–			189
Impairment losses		137			–			–			–			–			137
Currency translations		88			41			58			29			–			216
Other changes		9			(13	)		–			–			–			(4	)
Balance at end of period	$	(6,483	)	$	(1,524	)	$	(885	)	$	(1,425	)	$	–		$	(10,317	)
Net balance at end of period	$	1,907		$	322		$	589		$	417		$	1,236		$	4,471
	For the year ended October 31, 2020
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
(Millions of Canadian dollars)	Internally<br> generated<br> software			Other<br> software			Core<br> deposit<br> intangibles			Customer<br> list and<br> relationships			In process<br> software			Total
Gross carrying amount
Balance at beginning of period	$	6,941		$	1,684		$	1,567		$	1,773		$	1,240		$	13,205
Additions		54			47			–			143			1,157			1,401
Acquisitions through business combinations		–			6			–			10			–			16
Transfers		936			193			–			–			(1,129	)		–
Dispositions		(149	)		(13	)		–			–			(4	)		(166	)
Impairment losses		(116	)		(4	)		–			–			(10	)		(130	)
Currency translations		20			7			19			13			8			67
Other changes		(10	)		(19	)		–			(23	)		(21	)		(73	)
Balance at end of period	$	7,676		$	1,901		$	1,586		$	1,916		$	1,241		$	14,320
Accumulated amortization
Balance at beginning of period	$	(5,256	)	$	(1,357	)	$	(627	)	$	(1,291	)	$	–		$	(8,531	)
Amortization charge for the year		(855	)		(144	)		(160	)		(114	)		–			(1,273	)
Dispositions		147			12			–			–			–			159
Impairment losses		88			–			–			–			–			88
Currency translations		(14	)		(6	)		(6	)		(9	)		–			(35	)
Other changes		6			(5	)		–			23			–			24
Balance at end of period	$	(5,884	)	$	(1,500	)	$	(793	)	$	(1,391	)	$	–		$	(9,568	)
Net balance at end of period	$	1,792		$	401		$	793		$	525		$	1,241		$	4,752
Note 11 Joint ventures and associated companies
---

	As at
(Millions of Canadian dollars)	October 31<br> <br>2021		October 31<br> <br>2020<br>(1)
Within 1 year:
less than 3 months	$	133,776	$	123,290
3 to 6 months		64,062		65,782
6 to 12 months		83,871		80,737
1 to 2 years		45,532		34,400
2 to 3 years		29,204		42,907
3 to 4 years		24,573		21,136
4 to 5 years		25,329		22,885
Over 5 years		32,560		30,727
	$	438,907	$	421,864
Aggregate amount of term deposits in denominations of one hundred thousand dollars or more	$	416,000	$	388,000
(1)	Amounts previously presented were reclassified to reflect the contractual maturities of certain term deposits.
---	---

	As at
	October 31<br> <br>2021		October 31<br> <br>2020
Life Insurance
Canadian Insurance
Mortality rates <br>(1)		0.12%		0.11%
Morbidity rates <br>(2)		1.78		1.81
Future reinvestment yield <br>(3)		3.76		3.82
Lapse rates <br>(4)		0.50		0.50
International Insurance
Mortality rates <br>(1)		0.79		0.66
Future reinvestment yield <br>(3)		2.90		3.05
(1)	Average annual death rate for the largest portfolio of insured policies.
---	---
(2)	Average net termination rate for the individual and group disability insurance portfolio.
---	---
(3)	Ultimate reinvestment rate of the insurance operations.
---	---
(4)	Ultimate policy termination rate (lapse rate) for the largest permanent life insurance portfolio that relies on <br>a<br>higher termination rate to maintain its profitability (lapse-supported policies).
---	---

			Net income impact<br> <br>for the year ended
(Millions of Canadian dollars, except for percentage amounts)	Change in<br> variable		October 31<br> <br>2021			October 31<br> <br>2020
Increase in market interest rates <br>(1)		1%	$	(14	)	$	5
Decrease in market interest rates <br>(1)		1		17			(11	)
Increase in equity market values <br>(2)		10		8			8
Decrease in equity market values <br>(2)		10		(10	)		(22	)
Increase in maintenance expenses <br>(3)		5		(37	)		(37	)
Life Insurance<br> <br>(3)
Adverse change in annuitant mortality rates		2		(287	)		(278	)
Adverse change in assurance mortality rates		2		(67	)		(70	)
Adverse change in morbidity rates		5		(213	)		(219	)
Adverse change in lapse rates		10		(253	)		(252	)
(1)	Sensitivities for market interest rates include the expected current period earnings impact of a 100 basis points shift in the yield curve by increasing the current reinvestment rates while holding the assumed ultimate rates constant. The sensitivity consists of both the impact on assumed reinvestment rates in the actuarial liabilities and any changes in fair value of assets and liabilities from the yield curve shift.
---	---
(2)	Sensitivities to changes in equity market values are composed of the expected current period earnings impact from differences in the changes in fair value of the equity asset holdings and the partially offsetting impact on the actuarial liabilities.
---	---
(3)	Sensitivities to changes in maintenance expenses and life insurance actuarial assumptions include the expected current period earnings impact from recognition of increased liabilities due to an adverse change in the given assumption over the lifetime of all in-force policies.
---	---
Note 15 Segregated funds
---

	For the year ended
	Pension plans					Other post-employment<br><br> benefit plans
(Millions of Canadian dollars)	October 31<br> <br>2021		October 31<br> <br>2020			October 31<br> <br>2021			October 31<br> <br>2020
Current service costs	$	359	$	367		$	46		$	46
Past service costs		–		–			(1	)		(12	)
Gains and losses on settlements		2		(5	)		–			–
Net interest expense (income)		7		15			57			59
Remeasurements of other long-term benefits		–		–			(12	)		13
Administrative expense		13		18			–			–
Defined benefit pension expense	$	381	$	395		$	90		$	106
Defined contribution pension expense		235		226			–			–
	$	616	$	621		$	90		$	106

	For the year ended
	Defined benefit pension<br> <br>plans						Other post-employment<br><br> benefit plans
(Millions of Canadian dollars)	October 31<br> <br>2021			October 31<br> <br>2020			October 31<br> <br>2021			October 31<br> <br>2020
Actuarial (gains) losses:
Changes in demographic assumptions	$	–		$	–		$	(6	)	$	(14	)
Changes in financial assumptions		(1,253	)		791			(177	)		62
Experience adjustments		(5	)		2			3			40
Return on plan assets (excluding interest based on discount rate)		(1,614	)		(793	)		–			–
Change in asset ceiling (excluding interest income)		5			–			–			–
	$	(2,867	)	$	–		$	(180	)	$	88

•	the nature of the underlying benefit obligations, including the duration and term profile of the liabilities;
•	the member demographics, including expectations for normal retirements, terminations, and deaths;
---	---
•	the financial position of the pension plans;
---	---
•	the diversification benefits obtained by the inclusion of multiple asset classes; and
---	---
•	expected asset returns, including asset and liability correlations, along with liquidity requirements of the plan.
---	---

(Millions of Canadian dollars, except participants and years)	As at October 31, 2021
	Canada		International		Total
Number of plan participants		67,580		5,321		72,901
Actual benefit payments 2021	$	564	$	32	$	596
Benefits expected to be paid 2022		659		34		693
Benefits expected to be paid 2023		679		34		713
Benefits expected to be paid 2024		700		35		735
Benefits expected to be paid 2025		720		35		755
Benefits expected to be paid 2026		738		35		773
Benefits expected to be paid 2027-2031		3,914		182		4,096
Weighted average duration of defined benefit payments		15.0<br>years		20.8 years		15.3 years

	As at
	Defined benefit pension<br> plans				Other post-employment<br> benefit plans
	October 31<br> <br>2021		October 31<br> <br>2020		October 31<br> <br>2021		October 31<br> <br>2020
Discount rate		3.3%		2.7%		3.6%		3.0%
Rate of increase in future compensation		3.0%		3.3%		n.a.		n.a.
Healthcare cost trend rates <br>(1)
– Medical		n.a.		n.a.		3.4%		3.5%
– Dental		n.a.		n.a.		3.1%		3.1%
(1)	For our other post-employment benefit plans, the assumed trend rates used to measure the expected benefit costs of the defined benefit obligations are also the ultimate trend rates.
---	---
n.a.	not applicable
---	---

	As at
	October 31, 2021								October 31, 2020
	Life expectancy at 65 for a member currently at								Life expectancy at 65 for a member currently at
	Age 65				Age 45				Age 65				Age 45
(In years)	Male		Female		Male		Female		Male		Female		Male		Female
Country
Canada		23.8		24.2		24.8		25.1		23.8		24.1		24.7		25.1
United Kingdom		23.6		25.4		25.3		27.2		23.5		25.3		25.2		27.1

	Increase (decrease)<br> <br>in obligation
(Millions of Canadian dollars)	Defined benefit<br> pension plans			Other post-<br> employment<br> benefit plans
Discount rate
Impact of 100 bps increase in discount rate	$	(2,113	)	$	(223	)
Impact of 100 bps decrease in discount rate		2,625			282
Rate of increase in future compensation
Impact of <br>50<br> bps increase in rate of increase in future compensation		56			–
Impact of <br>50<br> bps decrease in rate of increase in future compensation		(62	)		–
Mortality rate
Impact of an increase in longevity by <br>one<br> additional <br>year		444			31
Healthcare cost trend rate
Impact of <br>100<br> bps increase in healthcare cost trend rate		n.a.			64
Impact of <br>100<br> bps decrease in healthcare cost trend rate		n.a.			(54	)
n.a.	not applicable
---	---
Note 17 Other liabilities
---
	As at
---	---	---	---	---
(Millions of Canadian dollars)	October 31<br> <br>2021		October 31<br> <br>2020
Accounts payable and accrued expenses	$	1,867	$	1,500
Accrued interest payable		2,178		2,855
Cash collateral		16,712		19,433
Commodity liabilities		7,916		8,354
Deferred income		3,518		2,945
Deferred income taxes		74		52
Dividends payable		1,622		1,611
Employee benefit liabilities		2,038		2,424
Insurance related liabilities		366		341
Lease liabilities		5,077		5,357
Negotiable instruments		1,774		1,676
Payable to brokers, dealers and clients		6,461		5,108
Payroll and related compensation		9,340		7,476
Precious metals certificates		613		623
Provisions		601		618
Taxes payable		3,403		2,209
Other		6,741		7,249
	$	70,301	$	69,831

(Millions of Canadian dollars, except percentage and foreign currency)
Maturity	Earliest par value<br> redemption date			October 31 2021		October 31<br> <br>2020
July 15, 2022		5.38%		US150	188		$	205
June 8, 2023		9.30%			110			110
January 20, 2026 <br>(1)<br>, <br>(2)	January 20, 2021	3.31%			–			1,501
January 27, 2026 <br>(2)		4.65%		US1,500	1,916			2,148
September 29, 2026 <br>(2)<br>, <br>(3)	September 29, 2021	3.45%			–			1,017
November 1, 2027	November 1, 2022	4.75%		TT300	55			59
July 25, 2029 <br>(2)	July 25, 2024	2.74%	(4)		1,499			1,559
December 23, 2029 <br>(2)	December 23, 2024	2.88%	(5)		1,489			1,578
June 30, 2030 <br>(2)	June 30, 2025	2.09%	(6)		1,250			1,247
November 3, 2031 <br>(2)	November 3, 2026	2.14%	(7)		1,717			–
January 28, 2033 <br>(2)	January 28, 2028	1.67%	(8)		943			–
October 1, 2083	Any interest payment date		(9)		224			224
June 29, 2085	Any interest payment date		(10)	US174	215			231
					9,606		$	9,879
Deferred financing costs					(13	)		(12	)
					9,593		$	9,867

(1)	On January 20, 2021, we redeemed all $1,500 million of our outstanding non-viability contingency capital (NVCC) 3.31% subordinated debentures due on January 20, 2026 for 100% of their principal amount plus interest accrued to, but excluding, the redemption date.
(2)	The notes include NVCC provisions, necessary for the notes to qualify as Tier 2 regulatory capital under Basel III. NVCC provisions require the conversion of the instrument into a variable number of common shares in the event that OSFI deems the Bank non-viable or a federal or provincial government in Canada publicly announces that the Bank has accepted or agreed to accept a capital injection. In such an event, each note is convertible into common shares pursuant to an automatic conversion formula with a multiplier of 1.5 and a conversion price based on the greater of: (i) a floor price of $5.00 and (ii) the current market price of our common shares based on the volume weighted average trading price of our common shares on the Toronto Stock Exchange. The number of shares issued is determined by dividing the par value of the note (including accrued and unpaid interest on such note) by the conversion price and then times the multiplier.
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(3)	On September 29, 2021, we redeemed all $1,000 million of our issued and outstanding NVCC 3.45% subordinated debentures due on September 29, 2026 for 100% of their principal amount plus interest accrued to, but excluding, the redemption date.
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(4)	Interest at stated interest rate until earliest par value redemption date, and thereafter at a rate of 0.98% above the 3-month CDOR.
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(5)	Interest at stated interest rate until earliest par value redemption date, and thereafter at a rate of 0.89% above the 3-month CDOR.
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(6)	Interest at stated interest rate until earliest par value redemption date, and thereafter at a rate of 1.31% above the 3-month CDOR.
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(7)	Interest at stated interest rate until earliest par value redemption date, and thereafter at a rate of 0.61% above the 3-month CDOR.
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(8)	Interest at stated interest rate until earliest par value redemption date, and thereafter at a rate of 0.55% above the 3-month CDOR.
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(9)	Interest at a rate of 0.40% above the 30-day Bankers’ Acceptance rate.
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(10)	Interest at a rate of 0.25% above the U.S. dollar 3-month London Interbank Mean Rate (LIMEAN). In the event of a reduction of the annual dividend we declare on our common shares, the interest payable on the debentures is reduced pro rata to the dividend reduction and the interest reduction is payable with the proceeds from the sale of newly issued common shares.
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