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Gordon Nixon, CEO, Royal Bank Of Canada

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GORDON NIXON, CHIEF EXECUTIVE OFFICER OF ROYAL BANK OF CANADA, TALKS TO ERIK SCHATZKER ABOUT THE CANADIAN BANKING INDUSTRY

MARCH 24, 2010

SPEAKERS: GORDON NIXON, CHIEF EXECUTIVE OFFICER, ROYAL BANK OF CANADA ERIK SCHATZKER, BLOOMBERG NEWS JULIE HYMAN, BLOOMBERG NEWS

JULIE HYMAN, BLOOMBERG NEWS: Our Erik Schatzker, native son we should say of Canada, is with Gordon Nixon, the CEO of Royal Bank of Canada. Erik?

ERIK SCHATZKER, BLOOMBERG NEWS: Thank you very much, Julie and Mark. And I will add that my voice isn’t as good as it should be today but I’ll do my best with Gord Nixon, the CEO of Royal Bank of Canada. Gord, very glad you could be here with us.

GORDON NIXON, CHIEF EXECUTIVE OFFICER, ROYAL BANK OF CANADA: Great to be here, Erik.

SCHATZKER: We do have a lot of questions to ask and we do hope to learn some lessons from the Canadian bank experience, but I have a question for you related to something that we have heard so much of down here in the United States over the past couple of years, the catch word, if you will, from the financial crisis, too big to fail.

Royal Bank of Canada is the fifth largest financial institution in North America no matter how you slice it. Assets, market cap, it doesn’t matter. Are you guys too big to fail?

NIXON: You know, I don’t think anyone’s too big to fail. I think the problem with the definition or the phrase too big to fail is that it assumes that you’re managing an institution in a normal environment. And I think in a normal environment no institution is too big to fail. In fact, we’ve gone through sort of the internal living will process, if you will.

We’ve met with the college of supervisors. And I think there’s an ability for most institutions to, you know, manage as they get into crisis to liquefy, sell assets, et cetera. The challenge is, you know, too big to fail in an environment where everybody else around you is failing, that becomes a very different issue.

And you know, that gets to the issue of global financial systemic risk, which I think has to be separated from too big to fail. But in a normal environment, no institution’s too big to fail.

SCHATZKER: Let’s talk about an issue that Mark and Julie introduced just before we began here, which is the fact that so much praise has been heaped on the Canadian banking system and Canadian banks like yours, the way that they’re managed. Is it really that solid? Is it possible that there’s a little bit of complacency risk here?

NIXON: I don’t think there’s complacency risk. I think that the, you know, that the reasons that Canada’s system performed better it’s – there are many of them. You know, it starts with, I think, a sound domestic economic environment.

You know, probably the biggest differentiator was the fact that our residential real estate market and mortgages and asset class were one of the strongest performing through the crisis compared to the United States, where the source of this crisis was the weakness in residential mortgages as an asset class.

In addition to that, I think the fiscal situation in the country is stronger. The fundaments and balance sheets of consumers, governments, are stronger. I think from a policy perspective and regulatory perspective there were some things that were managed quite well.

And frankly, I think different institutions managed themselves quite effectively through the crisis as well. So I think it was a combination of a bunch of things. But I don’t think we’re complacent at all.

SCHATZKER: I want to jump on your comment about mortgages for just one minute because the Canadian housing market has remained so robust that even American newspapers are beginning to take notice of the kinds of year-over- year home price appreciation that we’re seeing there, 20 percent in January. Everybody, including the finance minister and the prime minister, have said they don’t believe there’s a housing bubble.

NIXON: Right.

SCHATZKER: Do you think there’s a housing bubble?

NIXON: I don’t think there is. I mean firstly, if you actually look at values relative to other markets and what happened in the United States, while we’ve had good performance over the last couple of years we’re sort of back to our record levels, which never had the same degree of escalation in markets like the U.S. and the United Kingdom.

In addition to that, again, the fundamentals of the marketplace are much different. We don’t have subprime lending, ratchet rate mortgages. Most backed mortgages are held on the balance sheets of the financial institutions. High ratio mortgages are insured and so as a result the ability of the system to manage a decline in real estate is much stronger than it would be south of the border.

So I think from a structural perspective the marketplace is structurally much sounder than it is in the United States or was in the United States. The interesting thing is that home ownership levels are actually higher in Canada than they are in the United States.