Bank of Montreal 1998 Annual Report Download - page 56

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BANK OF MONTREAL GROUP OF COMPANIES
ENTERPRISE-WIDE RISK MANAGEMENT
drawdowns, as well as the impact of changing business environments on liquidity require-
ments. The analyses are evaluated to enable us to react to changes in an appropriate and
timely manner.
In the ordinary course of business, to support our participation in clearing and payment
systems, both domestically and abroad, a portion of liquid assets is pledged as collateral.
At October 31, 1998 $41.4 billion of assets and securities had been pledged, primarily for
obligations related to assets sold under repurchase agreements. This amount is up $4.8 billion
from last year, and is included in our liquidity analyses.
Three primary sources of funds are used to provide liquidity: retail deposits, wholesale
deposits and the capital markets.
Our large base of deposits by individuals provides a long-term, stable source of funding.
These deposits, along with our strong capital base, reduce our reliance on other, more volatile
sources of funds.
Our wholesale source of funds continues to be broadly diversified by customer, type, mar-
ket, maturity term and currency. Wholesale international deposits are generally short-term
in nature, supporting our wholesale international assets, which are largely similar in nature.
Our wholesale funding activities are performed by professional teams situated in several
key financial markets worldwide, and are subject to stringent liability diversification policies.
We continue to access the capital markets for medium to long-term funds as required and
when market opportunities permit. This complements daily cash management activities,
providing diverse funding sources and enables us to take advantage of cost-efficient funding
opportunities. The activity in the capital markets usually involves funds that are two to ten
years in term.
Asset securitization provides an alternate source of funds through the sale of assets. During
1998 we securitized $9.7 billion of assets. Further information about securitization can be
found in the Capital Management section on page 50. Our asset securitization capabilities
contribute to our liquidity and funding risk management program.
Our liquidity ratio at October 31, 1998 was 28.4%, down from 35.6% in 1997. The decrease
was the result of two factors: continued growth in our Canadian dollar loans such as residen-
tial
mortgages, and the reduction in our liquid assets of $10.8 billion, or 14.6%, particularly
in U.S. money market placements as part of our ongoing portfolio management initiatives.
Total liquid assets increased $13.2 billion, or 21.8% in 1997. The increase in the level of
liquid assets in 1997 was mainly due to increased interbank placements of $8.6 billion and a
continued increase in securities of $5.2 billion. Nonetheless, the liquidity ratio decreased
0.2% in 1997 as a result of strong growth in most loan categories throughout 1997.
OPERATIONAL RISK
Thefinancialmeasureofoperationalriskisactuallossesincurred.Nomateriallossesoccurred
in 1998 or in 1997; however, there is no assurance that we will not suffer such losses in the
future due to the nature of the risk. Operational risk is managed through the establishment
of effective infrastructure and controls. Key elements of the infrastructure are qualified, well-
trained personnel, clear authorization levels and reliable technology. Controls, established by
documented policies and procedures, include the regular examination of internal controls
by an independent internal audit function, segregation of duties, and financial management
and reporting. In addition we maintain insurance coverage, contingency plans for systems
failure or catastrophic events, including back-up systems with off-site data storage, and pre-
testing and parallel implementation of new systems.
An indirect subsidiary of the Bank has been named as a defendant in legal actions, which
are described in note 20 to the consolidated financial statements.
Note: For more information see Table 17 on page 65.
9897969594
LIQUID ASSETS-TO-
TOTAL ASSETS
63.2
74.0
60.8
53.3
41.2
Securities ($ billions)
Cash resources and deposits with
other banks ($ billions)
Cash and securities-to-total
assets
(%)
35.6 28.4
35.8
35.1
29.8
Ter m
(%)
Notice
(%)
Demand
(%)
DEPOSITS BY TYPE
22.2
11.2
66.6
OUTLOOK
We maintained a strong level of liquidity in 1998, and a strong retail deposit base. Although the
economy is expected to slow in 1999, management will continue to manage liquidity by maintaining
sufficient funds and funding capacity as well as a strong diverse deposit base.
Note: For more information see Table 18 on page 65.
Banks
(%)
Individuals
(%)
Business/Governments
(%)
DEPOSITS BY CUSTOMER
41.5
40.3
18.2
48