Bank of Montreal 1999 Annual Report Download - page 47

Bank of Montreal Group of Companies 1999 Annual Report 41
Performance Review:
The tables below provide a summary of our interest rate
and overall market risk sensitivity.
Interest Rate Risk Sensitivity
– Rising Interest Rates
Structural and money
market portfolios
As at October 31, 1999 100 basis Rising interest
(after-tax Canadian equivalent $ millions) point increase rate risk(b)
Earnings at risk over the next 12 months (a) 70.2 43.6
Economic value at risk (a) 351.0 438.7
(a)
Risk measures include the impact of embedded options but exclude actions that we could
take to reduce risk or the actions that clients might take in response to changing rates.
Other assumptions are consistent with those disclosed for the gap position in Table 7 on
page 63
of the Annual Report.
(b) Risk measures are based upon statistical analysis of historical data on an individual
portfolio basis using a 97.5% confidence level.
BIS
– Market Risk Capital for Trading Books
Effective April 30, 1999, we received approval to use an
integrated VaR model approach in the market risk regu-
latory capital calculation. The integrated VaR model
measures the market risk associated with both foreign
exchange and trading interest rate risk.
I-VaR Summary for the Period from Feb.1 to Oct. 31, 1999
(US$ millions)*
High 13.8
Low 4.3
Average 8.2
As at year-end 11.3
*One-day measure using 99% confidence level.
The “standardized approach” continues to be used for the
other risk categories, commodities, equities and “specific”
risk. Overall, the BIS “minimum capital requirement for
market risk” is $538 million at October 31, 1999, down
from $647 million at the end of fiscal 1998, due primarily
to the
lower interest rate risk capital requirement calcu-
lated under the VaR approach.
Market Risk Sensitivity
–
Adverse Changes in Market Rates/Prices (a)
As at October 31 1999 1998
(after-tax Canadian equivalent $ millions) Cdn$ US$ Cdn$ US$
Earnings at risk over
the next 12 months (b) 54.4 45.1 43.1 33.2
Economic value at risk (b) 371.1 98.1 390.3 104.7
(a)
Earnings at risk and economic value at risk include Cdn$17.5 and US$12.8 in 1999,
and Cdn$22.7 and US$16.7 in 1998, related to trading portfolios.
(b) Assumptions for the model are consistent with (a) and (b) under interest rate risk
sensitivity, with the additional inclusion of minimum rates on deposits.
The decrease in economic value at risk from 1998 to
1999 reflects the impact of recent market conditions on
the historical data included in our model, as well as con-
tinued asset growth. The increase in earnings at risk
from 1998 to 1999 reflects increased exposures in the
structural balance sheets.
Liquidity Risk
Strategy:
Ourgoalistomaintainsufficientfundsandfundingcapac-
it
y to meet our net cash outflow commitments, both on-
and off-balance sheet. In the event of a liquidity crisis,
such commitments would be covered without
having
to raise funds at unreasonable prices or sell assets
on a
forced basis. Our objectives are thus to ensure the sta-
bility of our deposit base through diversification, and to
maintain an appropriate level of liquid assets.
Approach:
Our approach to liquidity management is to measure
and forecast liquidity requirements based on expected
economic, market, political and enterprise-specific
events. This enables us to determine if we have sufficient
funds available to meet all short-term liquidity demands,
even in times of crisis. Funds would encompass both
liquid assets on hand and the capability to raise additional
funds to meet liquidity requirements. Liquidity risk is
measured by estimating our potential liquidity and
funding requirements within stressed environments. We
continuously monitor liquidity risk and actively manage
our balance sheet to minimize this risk.
We also access the capital markets for medium to
long-term funds as required and when market opportu-
nities permit. This complements daily cash management
activities and provides diverse funding sources, enabling
us to take advantage of cost-efficient funding opportuni-
ties.
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 1999 we securi-
tized $500 million of assets. Further information about
securitization can be found in the Capital Adequacy sec-
tion on page 36. Our asset securitization capabilities
contribute to our liquidity and funding risk manage-
ment program.
Preparation for Year 2000 risk has represented a poten-
tial
liquidity issue for the financial services industry. In
the process of mitigating this risk, we have enhanced
our monitoring and strategic response techniques.
These
have been incorporated into our current liquidity and
funding risk management processes.
Measures:
Our primary measure of liquidity is the liquidity ratio,
with our secondary measure being core deposits as a
percentage of total deposits. Both of these measures
are
discussed in more detail on page 34.