Bank of Montreal 1997 Annual Report Download - page 48

Bank of Montreal 180th Annual Report 199742
Position risk activities are largely managed within Global Treasury’s Risk Management Group. It is our policy to identify,
measure, monitor and control all market risk-taking activities including management of both our structural and trading
position risks. In order to achieve this, we have established a Corporate Standard for Position Risk Tolerance to define the
maximum potential exposures that are permissible for position risk activities. The Standard is defined in terms of both
earnings at risk and mark-to-market risk and applies to all risk arising out of interest rate, foreign exchange, commodity
and equity positions at the Bank and our subsidiaries. The Corporate Standard is reviewed annually by the Risk
Management Committee and subsequently approved by the President and Chief Operating Officer.
Liquidity risk management is part of our overall risk management framework. We ensure sufficient funding to meet all
short-term liquidity demands by establishing minimum liquid asset requirements and limits with regard to the reliance
on short-term wholesale deposits. Liquidity risk is managed through proactive balance sheet management within the
context of current market conditions.
Operational risk is managed by a system of internal controls that requires segregation of duties, appropriate recording
of transaction processing, financial and managerial reporting, and insurance coverage. We emphasize ongoing training
to constantly improve the skills of our workforce. In addition, we maintain contingency plans for systems failure or
catastrophic events, including back-up systems, pre-testing and parallel implementation of new systems. Operational
controls are subject to regular internal audit reviews.
The Risk Spectrum
Credit Risk
Credit risk is the risk that we will incur a loss due
to the failure of a counterparty
†
or borrower
to meet its contractual financial obligation.
Credit risk arises from traditional lending
activity, from settling payments between
the Bank and its counterparties and
from providing products that result in
replacement risk. Replacement risk
arises when a client’s commitments
to us are determined by reference to
changing values of contractual oblig-
ations, for instance derivatives and
other Treasury products. Replacement
risk is subject to the same credit process
used for other forms of credit exposures.
Liquidity Risk
Liquidity risk is the risk of being unable to meet
financial commitments, under all circum-
stances, without having to raise deposits at
unreasonable prices or sell assets on a
forced basis.
Operational Risk
Operational risk is the potential for
loss (including the adverse impact on
our reputation) as a result of a break-
down in communications, information
or transaction processing or legal/
compliance issues, due to systems or
procedural failures, error, natural disasters
or criminal activity.
Operational Risk
Liquidity Risk
Position Risk
Credit Risk
The Risk Spectrum
Risk Management Continued
Position Risk
Position risk is uncertainty as to the impact on
future earnings or shareholders’ equity arising from
volatility in underlying market factors, including interest and foreign exchange rates, and equity and commodity prices.
Interest rate risk is the risk that net interest income and/or shareholders’ equity will decrease because of an adverse movement in interest rates.
Foreign exchange risk is the potential for losses resulting from adverse currency movements in relation to open foreign exchange positions.
Commodity and equity risk is the potential for losses resulting from adverse movements in the commodity or equity markets.
†
Defined in the Glossary on page 90