Bank of Montreal 1999 Annual Report Download - page 43

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Enterprise-Wide Risk Management
Bank of Montreal Group of Companies 1999 Annual Report 37
Our objective is to earn competitive returns from our various business activities at acceptable risk levels. Risk management involves
overseeing the risks associated with all our business activities in the environment in which we operate, ensuring that the risks taken are
within prudent boundaries, and that the prices charged for products and services reflect these risks. Risk is calculated in terms of
impact on income and asset values. We assess the potential effect on our business of changes in political, economic, market and operating
conditions, and the creditworthiness of our clients, using four risk categories which are described in the risk spectrum below.
In the management of these risks we rely on the competence, experience and dedication of our professional staff operating with
appropriate segregation of duties and utilizing sophisticated, quantitatively based analytical tools and state-of-the-art technology. This
combination of prudence, analytical skills and technology, together with adherence to our operating procedures, is reflected in the
strength and
quality of our earnings over time.
Strategy:
Identify, price and manage risk to maintain an appro-
priate risk-return relationship;
Use comprehensive and integrated risk measurement
and reporting processes to ensure that risk is managed
consistently and effectively on an enterprise-wide
basis; and
Employ proven analytical techniques, supported by
business experience and sound judgement, to under-
stand all dimensions of the risks taken.
Approach:
Promote a strong and proactive culture, giving a high
value to disciplined and effective risk management;
Communicate clear and concise risk management stan-
dards through policies, directives, operating procedures
and training, with adherence to the policies and pro-
cedures verified by an objective internal audit process;
Employ professional and dedicated personnel with a high
degree of risk management expertise and experience;
Adhere to stringent risk management techniques for
the evaluation and acceptance of risk, and the segre-
gation of responsibilities; and
Utilize established, leading-edge analytical tools and
technologies to properly capture and price risk, moni-
tor positions and determine the potential impact of
management initiatives and strategies.
Governance:
Authority for all risk-taking activities rests with the
Board of Directors and its Risk Review Committee,
which approves risk management policies, delegates
limits and reviews management’s assessment of risk
in the major risk-taking activities.
The Risk Review Committee’s approval and oversight
functions are supported by the management structure,
which includes the Risk Management Committee (and
its sub-committees dealing specifically with asset/
liability, liquidity and market risk management), the
Counterparty Risk Council and an independent Risk
Management Group.
Risk Management Group reports directly to the Chief
Executive Officer, and also provides periodic reports to
the Risk Review Committee of the Board of Directors.
The group brings together the functions of policy devel
-
opment, standard/guideline-setting, risk measurement
and risk reporting, using a range of methodologies to
aggregate risks of different types across the enterprise.
While each line of business is accountable for the risks
it undertakes, including monitoring those risks, the
Risk Management Group oversees risk-taking activi-
ties enterprise-wide, ensuring adherence to policies
and standards.
Liquidity Risk†
Liquidity risk is the risk of being unable to
meet financial commitments, under all
circumstances, without having to raise funds
at unreasonable prices or sell assets on
a forced basis.
Credit Risk†
Credit risk is the potential for loss due to the
failure of a counterparty
†
or borrower to meet
its financial obligations. Credit risk arises
from traditional lending activity, from settling
payments between financial institutions and
from providing products that create replace-
ment risk†. Replacement risk arises when a
counterparty’s commitments to us are deter-
mined by reference to the changing values
of contractual commitments, for instance,
derivatives and other treasury products. The
same credit process is used for all clients.
Market Risk†
Market risk is the potential for loss arising
from potential adverse changes in underlying
market factors, including interest and foreign
exchange rates, equity and commodity
prices, spread and basis risk.
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Operational Risk†
Operational risk is the potential for loss from
a breakdown in communications, informa-
tion or legal/compliance issues due to
systems or procedural failures, human error,
disasters or criminal activity.
The Risk Spectrum
†Defined in the glossary on page 104.