Non-Market and Market Behavior, Economic Analysis of Behavior in Canada - Term Paper Example

?ANALYSIS AND DISCUSSION OF NON-MARKET AND MARKET BEHAVIOURS, ECONOMIC ANALYSIS OF BEHAVIOUR This study is about the analysis of Canadian political processes and its impact on the Canadian industries. First of all a brief overview of the Canadian economy has been provided. Financial sector performance in Canada has also been studied. Royal Bank of Canada is one of the largest financial institutions in Canada which operates in the financial services sector of the country. The major stakeholders of RBC have been identified. Environmental and regulatory environment of RBC has been studied. Its impact on RBC and various strategies adopted by the company because of those economic impacts on the organization has also been discussed in this study. The role of cooperative and political behaviors in relation with the market based behaviors of RBS has been studied. Different strategies and policies that have been employed by RBC or are planning to employ have also been included in this study. Table of Contents Table of Contents 3 Canadian Economy – An Overview 5 Financial Sector in Canada – An Overview 6 Royal Bank of Canada 7 Stakeholders of RBC 8 Clients 8 Employees 9 Shareholders or Investors 9 SRI Community 10 Suppliers 10 Governments 10 Environmental NGOs 10 Economic and Regulatory Environment of RBC 11 Canada 11 United States 11 Europe 12 Financial Markets 13 Regulatory Environment 13 Economic Impact 14 Corporate Strategies by RBC 15 Corporate Governance 15 Risk Management 17 Policies and Procedures 17 Mutual Funds and Governance 18 References 19 Canadian Economy – An Overview The economic system of Canada is very much similar to that of United States of America. The industrial society of Canada is high tech in nature and is quite affluent in its resources. The standard of living of the people is quite high. There has been a significant growth in various industrial sectors of Canada like mining, manufacturing, services sector, etc. after the end of World War II in the year 1945. It has resulted in the transformation of the Canadian economy which was rural in nature into an urban and industrial economy. United States serves as the main trading partner of Canada. There have been various trade agreements between these two countries recently like the North American Free Trade Agreement (NAFTA) and Canada-US Free Trade Agreement (FTA). This has helped in the development of economic integration and trade between the two countries to a considerable amount. Three-fourths of the exports generated from Canada are accounted through a substantial amount of surplus in trade with US. Canada is amongst one of the largest supplier of oil, gas, electrical power and other energy sources for United States. Canada managed to have a significant growth in its economy during the period of 1993 to 2007 because of its varied natural resources, modernized plants and labor forces which are highly skilled in nature. At the end of the year 2008, Global Financial Crisis (GFC) had an adverse effect on the Canadian economy and it went into economic recession. In 2009, the country experienced fiscal deficit for the first time in 12 years time. However the major banks in Canada have managed to recover for the ill effects of recession because of its tradition of having strong capitalization and lending practices which are highly conservative in nature. There has been a marginal growth of Canadian economy in the years 2010-2011. By 2005 it is supposed to be able to balance its budget. The petroleum sector of the country is growing at a rapid pace because of the discovery of many new natural oil reserves in Canada. Canada is ranked in the third position in the world with regards to the volume of oil reserves present in the country (CIA, 2012). Financial Sector in Canada – An Overview The financial services sector of Canadian economy consists of banks, loan companies, trusts, insurance companies, credit unions, securities dealers, companies of mutual funds, leasing companies, insurance agents, financial advisors, different types of fund managers, etc. There is a considerable amount of convergence amongst the companies operating in the financial services sector of the country with respect to the product offered by them. This results in the formulation of large sized financial groups operating in the country. Wide range of financial services is offered by these financial groups and is particularly more prevalent in the insurance sectors and banking sectors of Canada. Its services include taking of deposits, management of wealth and insurance, etc. In addition to these, some organizations have emerged recently in the country which has its focus on only one or two lines of business which are better known as "monoline" organizations (Jackson, 2009, p.7). A considerable portion of the economic growth of Canada is derived from its business sector offering financial services. In the year 2000, more than 0.5 million Canadians were employed in the sector of financial services, with a yearly payroll around $24 billion. This particular sector is believed to form 5 per cent of the total GDP of Canada in the year 2000. Around $9 billion taxes were collected from this sector in 2000. The most predominant player in the financial services sector of Canada are the banks whose aggregate assets amounted to around $1080 billion in 2000 and most of these assets are located in Canada itself. The next predominant player in this sector is the insurance companies. Next in ranking come the credit union entities. Not only in Canada but its financial institutions mark their presence all over world in different other countries as well. The return on equity generated by the financial institutions like banks and insurance companies are significantly high. There has been a significant growth in claims amounts. The jurisdiction exercised over the sector of financial services in Canada is shared amongst provincial and federal governments. The banks are solely governed by the federal government and the provincial governments have the responsibility of governing other financial institutions in the country like mutual fund companies and credit unions. The trusts, insurance companies and the loan companies are governed by the governments at both levels, that is provincial and federal. Different types of challenges that creep up because of globalization and technological innovations have resulted in the enhancement of consolidation within the sector of financial services in the country (Department of Finance Canada, 2002). Royal Bank of Canada Royal Bank of Canada (RBC) is considered to be the largest bank operating in Canada. RBC along with its subsidiaries operates its business of providing financial services all over the world in different countries including Canada. Its shares are traded in the NYSE and TSE with the ticker symbol "RY". It was founded in the year 1864 and is headquartered at Toronto, Canada (Yahoo Finance, 2012). It is undoubtedly considered to be the largest bank present in Canada with respect to the assets owned by it and its market capitalization. Its product and services mix is well diversified in nature and includes services like commercial and personal banking, investment banking, corporate banking, services of wealth management, insurance, etc. which are offered to its stakeholders worldwide. According to the Annual Report of the company for the year 2011, RBC had 74,000 employed personnel. It offers services to its clients, which includes around 15 million personal clients, business clients, and business or corporate clients through its offices which are located in Canada, United States and 56 other nations present worldwide (RBC, 2012a, p.9). Stakeholders of RBC The major stakeholders of RBC comprises of employees, investors of the company, clients, regulators, community partners and non-governmental organizations (NGOs). Clients In order to become the preferred financial institution for the clients, RBC is engaged in activities related to complete satisfaction of its clients. RBC has a team of research experts present in-house of the company and vendors which help them to provide them with proper feedbacks from them. As an important mechanism for measuring the performance of the employees and its different business units, RBC is engaged in keeping a track on the loyalty and satisfaction levels of its clients. The client surveys designed internally and market benchmarking for the company are generally administered by the third-party suppliers. RBC tries to improve its services and products utilizing the feedbacks from the clients. It also helps RBC in the development of strategies related to its clients and marketing channels. Moreover the information generated from the public through the opinion surveys are utilized by the company are used to fine tune its strategies related to its clients and products. The requests from different clients are kept in the records of the company through a central database maintained by RBC for the purpose specifically. The feedbacks of the clients are processed through the centre for Client Care and the Ombudsman office of RBC. Direct interviews of the clients are organized by RBC to keep a track on all the issues related to its clients. Employees The opinions of the employees are collected through opinion surveys conducted by the company. It mainly relates to the fields of employee engagement, leadership, working relationships, workforce diversity, company values, performance management, career development and the working environment of RBC in general. The surveys are mainly based on a model of employee engagement which helps to review the engagement scores of each of its business units. Statistical analyses are carried out by RBC in order to identify the trends. The results obtained through statistical analysis are then compared with the external benchmarks. This type of survey is conducted every year by the company. Employees of RBC are also invited to participate in poll related to the corporate citizenship topic. Shareholders or Investors The overall strategy for the investors is set out by the Investor Relations (IR) group of RBC. They are engaged in maintaining relationships and communicating with the investors, rating agencies, analysts of financial services and other investment community members of the company. The investors of RBC comprises of all different classes and types like common investors, preferred investors, institutional investors, retail investors, etc. The strategy of the rating agency of the company is also looked after by the IR group of the company. IR group is engaged in communicating with the company about the views, perceptions and concerns related to the investors, rating agencies and analysts. IR group and its different members meet the shareholders of the company on a regular basis. The feedbacks from the investors and analysts help formulating the strategies of RBC. The company publishes its annual reports and quarterly reports which help in interacting with the investment community. SRI Community Requests for information regarding the sustainability of RBC are constantly received from the Socially Responsible Investing (SRI) research organizations. Strategic reviews are performed on a regular basis in order find out efficient ways to respond to these types of requests received from the SRIs. Suppliers A procurement group has been designated by RBC who is responsible for services and product sourcing. Agreements at the service level govern the relationships of RBC with its major suppliers. The procurement guidelines of the company are reviewed on a continuous basis. Governments RBC maintains a good relationship with the government at various levels. The leaders of RBC engage themselves with the elected officials of Canadian government. RBC is involved in advocating over wide variety of issues related to agriculture, employment, environment, internal trade, financial institutions, securities regulation, competition policy, financial sector, and consumer interests. Environmental NGOs RBC officials are actively engaged with a wide number of NGOs so as to facilitate discussion on environmental issues concerned with policy development, portfolio management, transaction review, opportunities for business development and operational impacts.RBC engages themselves with NGOs like Canadian Boreal Initiative, Greening Greater Toronto Task Force, Pollution Probe, Durrell Wildlife Preservation Trust, World Wildlife Fund, etc. Economic and Regulatory Environment of RBC Canada It was estimated that the Canadian economy grew at a rate of 2.3% in the upcoming year 2011. For the year 2011, during its early phase, RBC showed signs of high growth in performance and resulted in high amount of business spending by the company. However, in the middle phase of the year 2011, the growth of RBC slowed down because of decline in the activity of manufacturing and disruption in the supply chain related to automotives due to the Tsunami and earthquake that took place in Japan. Next in the final phase of 2011, RBC managed to recover its growth position because of the rapid decline in the unemployment rate in Canada. The products of RBC related to home equities increased in volume because of the upsurge in housing activity in the country. The consumer and business spending are expected to rise moderately in the upcoming year assisted through stable market of labor. However the uncertainties related to the effects of Global Financial Crisis (GFC) are supposed to hinder the growth path of the company. United States It was estimated that the economy of United States grew at a rate of 1.8% in the year 2011. The concerns related to the Sovereign Debt Crisis in Europe had an adverse impact on the growth of US economy in the year 2011. During the middle phase of the year 2011, the growth slackened because decline in consumer spending caused due to the higher unemployment levels in US. Responding to this crisis situation, the Federal Reserve Bank of USA regulated the interest rates at a rate around 0 to 2.5%. Additional stimulus in policy was adopted by Fed towards further reduction in long term interest rates which would help in assisting the consumers to refinance its mortgages at a very low rate. However the US economy is supposed to improve in 2012. It would imply higher levels of investments in business through the low interest regime. Europe It was estimated that the Euro zone economy grew at a rate 1.7% in 2011. The prevailing Sovereign Debt Crisis in the Euro zone nations have resulted in the slower growth of the economy in the year 2011. Stringent fiscal measures being adopted in the European nations have resulted in the decline in confidence amongst business corporations and consumers. During the latter phase of 2011, there was a significant rise in the funding costs for the countries in Europe and resulted in the reduction of access of funds for the global financial institutions located in different European nations. The European Union (EU) responded to this crisis situation in Europe through the adoption of various policy measures regarding restructuring of the Greek Debt, additional capitalization of the banks and increased liquidity support for the funding institutions. Initially in the year 2011 there was a rise in the interest rates. However, those rates started falling considerably thereafter on a continuous basis. It is expected that there would be a decline in the growth of the economies in the countries of the Euro Zone. This would be supplemented with increase in levels of debt exposure and weakening of credit access. G20 nations and the EU are making considerable efforts through formulation of policies and funding mechanisms to counter the economic growth in Euro zone nations. However the effectiveness of these policies is highly uncertain in nature. This implies that there would be huge pressure on the funding costs for the Euro zone countries. The inflation rates are quite high and it is expected to remain so. Financial Markets During the first half of the year 2011, the capital markets present globally showed signs of improvement. However during the latter phase of 2011, the condition deteriorated drastically because of the issues related to Sovereign debt in Europe and the weakening of the economy globally. The market conditions were highly challenging in nature which resulted in the significant reduction in client volumes for the company. The volatility in trades increased and the spreads of credit rates continued to widen more and more. It was mainly because of the effect of decline in the liquidity in the financial markets during the latter phase of 2011. Issuance activities were observed to remain strong during most part of the year 2011. However it slackened a bit during the closing phase of 2011 because of the weakened environment in market conditions. Until and unless the global economy gets improved considerably and the issues related to Sovereign Debt in Europe is resolved completely the capital markets situated globally are expected to remain under huge pressure. The costs of funding for the global banks would continue to remain high. In addition to this, the regulatory requirements are supposed to be aligned with the option favoring high liquidity in the financial market worldwide. Regulatory Environment RBC is involved in practices which are in alignment with the regulatory requirements as laid down by the Basel Committee on Banking Supervision (BCBS). RBC is also committed towards following the requirements of other regulatory bodies like Basel-III, which sets out global standards for the reform of liquidity and capital structures of the company. RBC has responded in a positive towards the reforms and measures prescribed for the Over-the-Counter derivative instruments and recent consumer protection reforms. RBC have also started to respond towards specifically designed financial reforms like the Consumer Protection Act and Dodd-Frank Wall Street measures of reforms. RBC is making considerable efforts towards keeping a close eye on all the reforms and developments that are taking place in the global financial market and are responding to it accordingly. It would help them ensure that the adverse effects of those regulatory and reforms on RBC are minimized considerably. Economic Impact RBC and its business activities have a significant positive impact on the economy and nations where it operates its business. It is committed to generate returns for its shareholders, creating employment opportunities, paying taxes and purchasing services and goods from all different types of suppliers. RBC being a financial services organization lends its support towards the development of economy by providing services like lending loans, assisting in the growth of small businesses and promoting entrepreneurship and innovation. With the recent GFC, it had a significant on the economies of the world including Canada. As a result of it various stringent regulatory policies are being continuously applied by the Canadian government. It has its impact on RBC too. It has led to the development various issues which RBC are required to deal with. One such issue is that the consumers of RBC in North America are having loads of huge amounts of debt. RBC have reacted to this issue by promoting services related to financial management and borrowing which assists the clients in effective management of their existing debts. RBC also provides education and financial advice for its clients. The difficulties faced by the clients regarding their debt issues are addressed through credit counseling services provided by RBC. Another issue that is prevalent amongst the companies in the small business sectors is that they are cautious about borrowing money from banks like RBC because of the current economic scenario being very much uncertain in nature. The small businesses are avoiding any further debt and are more concerned about retaining its existing customers. RBC have responded to this situation by providing various services and facilities for the small business concerns like, providing credits, and giving expert advice to the small business units about how to manage its business in the current economic scenario. Launching of solar panel financing is one such initiative by RBC. Banks like RBC plays a significant role in promoting economic development. With the present downturn in economy because of GFC, like many other nations in the world, Canadian government is also committed towards the economic recovery of the nation. As a result of this financial service sectors are under huge pressure to assist in the economic recovery of the country. RBC have reacted to this position on a positive note by introducing means of providing ownership of homes for its clients which are sustainable in nature. RBC has implemented responsible strategies towards mortgage and equity financing products that they have in offer for its clients. Some of the investments made by RBC also help in generating financial as well as social returns. RBC helps to foster the growth of the economy by providing financial and credit advice for its clients. Corporate Strategies by RBC Corporate Governance RBC is committed to fulfilling its responsibilities towards the stakeholders of the company. It does so through the maintenance of corporate integrity within the organization. Different priorities set out by RBC towards performing its responsibility for the corporate includes governing in a responsible manner, effectively managing risk, ensuring its compliance towards various regulatory standards, and promoting the interests of investors in the financial services industry. RBC follows a governance approach in its organizational activities. Processes related to risk management are being continuously encouraged in RBC through investments in infrastructure and systems. RBC has updated its regulatory framework in order to facilitate compliance with the key regulatory requirements. It has developed a lobbying policy to be followed globally. The compliance policies of RBC are being continuously updated with the changing regulatory requirements in the financial sector. RBC has a framework for keeping track on and preventing money laundering activities being carried out in and through RBC. An independent committee for reviewing of the investment funds is being continuously promoted by the company. RBC has always tried to resolve various issues related to its shareholders and other stakeholders of the company. General public, regulators and shareholders of RBC have showed their concerns over transparency and accountability of the company related to executive compensation. This has made RBC to pay attention specifically towards the control and governance mechanisms being employed by the company in relation to executive compensation. RBC has developed a policy which helps the shareholders of the company to have the right to vote on the issues related to executive compensation. Some of the investors of RBC have raised their voice for the enhancement of diversity related to corporate boards. RBC responded to this situation by appointing two women as the member of Board of Directors of the company. Moreover, RBC is involved in performing a yearly review of the performance and credentials of the Board of Directors of the company. RBC has a fairly strong governance structure which helps in developing and maintaining strong relationships amongst the board members, management team, and all other stakeholders of the company. RBC ensures that ethical standards and behaviors are enforced within the organization which helps to improve its governance mechanisms. Risk Management Risk management procedure being followed by RBC is the key towards its long term sustainability in the financial services industry in Canada and abroad. RBC has developed a core competency in managing the risks associated with the business activities being carried out by RBC. It has a risk culture which is quite strong in nature and a framework for Enterprise Risk Management (ERM) which is quite effective in managing the risks. The ERM framework of the company helps it to identify, evaluate, control and represent the risks which the company faces. This approach of RBC helps it to achieve all the regulatory requirements of various relevant regulators in the financial services sector like the Office of the Superintendent of Financial Institutions (OSFI), hoe regulators, etc. Different types of disclosure and reporting mechanisms are being employed by RBC which gives a consistent and accurate picture of the risks associated with the business concern. RBC also has a framework called Enterprise Risk Appetite Framework which helps the company in determining and managing its capacity of handling the risks. RBC manages to protect its reputation by undertaking various measures which are responsive and proactive in nature. In order to ensure its compliance with the existing laws and regulations RBC maintains a framework known as Regulatory Compliance Management (RCM) framework. Policies and Procedures It is worthwhile mentioning the fact that the companies which are engaged in the business of financial services depend mostly on trust and confidence building. RBC being an organization which operates globally, it has to comply with all the regulations and laws which governs its business processes. The internal control mechanisms and policies are being reviewed by RBC on a continuous basis to ensure compliance with changing regulatory requirements in the financial sector. RBC maintains a string ethical culture within the organization. It has formulated formal policies which addresses the issues related to money laundering, privacy, economic sanctions, terrorist financing, environmental sustainability, etc. Hence a strong code of conduct is being organized within the organization. In total RBC operates in 58 nations of the world including Canada. RBC supports the enacted laws in Canada and other nations where it has its operational activities. It helps in deterring evasion of taxes, money laundering, tax fraud and other associated criminal activities. The needs and requirements of the stakeholders are being well addressed by the company through its business activities. RBC also follows and practices the Know Your Customers (KYC) norms. Mutual Funds and Governance Huge amount of money is invested by the investors and clients of RBC and thus possess significant trust on the company management. RBC maintains a strong governance mechanism related to mutual funds being offered by the company. The regulatory mechanisms are effective in promoting benefits for its investors. RBC Global Asset Management has the responsibility of managing the mutual funds of the company. The Canadian mutual funds being offered by RBC are reviewed by independent committees in the organization. RBC also ensures strong quality of corporate governance being followed in the company (RBC, 2012b, p.31). References CIA. (2012). The World Factbook: North America: Canada. Retrieved from https://www.cia.gov/library/publications/the-world-factbook/geos/ca.html. Department of Finance Canada. (2002). The Canadian Financial Services Sector. Retrieved from http://www.fin.gc.ca/toc/2002/fact-cfss_-eng.asp. Jackson. (2009). Canada’s Financial System: an Overview. Retrieved from http://digital.library.unt.edu/ark:/67531/metadc26178/m1/1/high_res_d/R40687_2009Jun26.pdf. RBC. (2012a). Royal Bank of Canada 2011 Annual Report. Retrieved from http://www.rbc.com/investorrelations/pdf/ar_2011_e.pdf. RBC. (2012b). Royal Bank of Canada: 2011 Corporate Responsibility Report and Public Accountability Statement. Retrieved from http://www.rbc.com/community-sustainability/_assets-custom/pdf/RBC-CRR-Report-e.pdf. Yahoo Finance. (2012). Royal Bank of Canada (RY): Profile. Retrieved from http://finance.yahoo.com/q/pr?s=RY+Profile. Read More