Bank of Montreal 1997 Annual Report Download - page 88

Bank of Montreal 180th Annual Report 199782
Our business necessitates the management of several categories
of risk including credit, position, liquidity and operational risks.
The nature of the risks of our business and our management of
them is set out in the discussion on pages 41 to 44 of our Manage-
ment Analysis of Operations. Specific measures of risk such as the
allowance for credit losses, trading revenue, derivative financial
instruments and fair value of financial instruments are set
out in the consolidated financial statements. A summary of our
interest rate gap position and effective interest rates on our finan-
cial instrument assets and liabilities is set out on page 56 of our
Management Analysis of Operations.
Note 18 Risk Management
(a) Credit Instruments
As a part of our business, we enter into various commitments
to provide our customers with sources of credit. These commit-
ments include:
• Guarantees and standby letters of credit which represent our
obligation to make payments to third parties on behalf of our
customers if our customers are unable to make the required
payments or meet other contractual requirements;
•
Securities lending which represents our credit exposure when we
lend our securities, or our customers’ securities, to third parties;
• Documentary and commercial letters of credit which represent
our agreement to honour drafts presented by a third party
upon completion of specific activities;
(b) Lease Commitments
We have entered into a number of non-cancellable leases for
premises and equipment in order to conduct business. Our total
contractual rental commitments outstanding as at October 31,
1997 are $948. The commitments for each of the next five
years
are $151 for 1998, $134 for 1999, $112 for 2000, $98 for 2001,
$83 for 2002 and $370 for 2003 and thereafter. Included in these
amounts are the commitments related to 688 leased Bank branch
locations as at October 31, 1997. Net rent expense for premises
and equipment reported in the Consolidated Statement of
Income was $166 for 1997, $156 for 1996 and $151 for 1995.
(c) Legal Proceedings
Nesbitt Burns Inc., an indirect subsidiary of the Bank of
Montreal, has been named as a defendant in several class and
individual actions in Canada and a class action in the United
States of America brought on behalf of shareholders of Bre-X
Minerals Ltd. (“Bre-X”). Other defendants named in one or more
of these actions include Bre-X, officers and directors of Bre-X,
mining consulting firms retained by Bre-X, Bre-X’s financial
advisor and brokerage firms which sold Bre-X common stock.
The actions are largely based on allegations of negligence,
misrepresentation and breaches of the Securities Exchange Act
of 1934 (U.S. only), in connection with the sale of Bre-X securi-
ties. All of the actions are at a very preliminary stage. Based upon
information presently available, counsel for Nesbitt Burns Inc.
are not in a position to express an opinion as to the likely out-
come of any of these actions. Management is of the view that the
Company has strong defences and will vigorously defend
against all such actions.
The Bank and its subsidiaries are party to other legal pro-
ceedings in the ordinary course of its business. Management
does not expect the outcome of any of these other proceedings,
individually or in the aggregate, to have a material adverse
effect on the consolidated financial position or results of the
Bank’s operations.
(d) Pledged Assets
In the normal course of our business, we pledge assets as security
for various liabilities that we incur. As at October 31, 1997 we
had pledged investment and trading account securities and other
assets totalling $35,879 (1996 – $31,480) as security for call loans,
• Commitments to extend credit to our customers in the form of
loans or other financings for specific amounts and maturities,
subject to meeting certain conditions;
• Note issuance and revolving underwriting facilities and similar
arrangements, including facilities under which we acquire
short-term notes issued by
our customers for a predetermined
price in the event that the customer is unable to sell the notes
to third parties.
In making these commitments, we expose ourselves to credit
risk, being the risk that we may incur a loss if a counterparty fails
to meet its obligations.
Note 19 Credit Commitments and Contingent Liabilities
Summarized below is our contractual and risk-weighted equivalent value of our various commitments, which are based on the rules
of capital adequacy of the Superintendent of Financial Institutions Canada. The risk-weighted equivalent value is used in the ongoing
assessment of our capital adequacy ratios.
1997 1996
Contract Risk-weighted Contract Risk-weighted
amount equivalent amount equivalent
Credit Instruments
Guarantees and standby letters of credit $ 10,562 $ 7,468 $ 8,303 $ 6,713
Securities lending 13,547 1,454 16,289 1,033
Documentary and commercial letters of credit 1,637 290 1,116 187
Commitments to extend credit:
Original maturity of one year and under 39,474 – 32,945 –
Original maturity of over one year 32,813 15,959 27,080 13,108
Note issuance and revolving underwriting facilities – – 33 17
Total $ 98,033 $ 25,171 $ 85,766 $ 21,058
Commitments to extend credit in respect of consumer instalment and credit card loans are excluded as the lines are revocable at our discretion.