Bank of Montreal 2002 Annual Report Download - page 31

BMO FINANCIAL GROUP ANNUAL REPORT 2002 27
BMO Financial Group has developed an enterprise-wide ability
to recognize, understand, measure, assess and manage the risks
taken across the organization.
Our enterprise-wide and risk-wide framework guides our
risk-taking activities and ensures that they are aligned with our
clients’ needs and our shareholders’ expectations. This frame-
work is applied across all of our risk management activities. It
includes the management of risks on an integrated basis as well
as direct management of credit, market, liquidity and funding,
and operational risks. The framework is built on the following
elements: comprehensive risk governance, effective processes
and models and qualified risk professionals.
Comprehensive Risk Governance
The risk governance structure is designed to ensure BMO has
a strong and well-informed risk culture geared toward making
sound business decisions that balance risk and reward and drive
the maximization of total return to shareholders. Risk governance
involves ensuring that revenue-generating activities are consis-
tent with our risk appetite and standards.
Our governance structure for risk-taking is based on the
following:
▪ TheRiskReviewCommitteeof theBoardofDirectorsexercises
oversight over all risk-taking activities by approving risk man-
agement policy, delegating risk-taking authority and limits,
reviewing position and limit reporting and reviewing man-
agement’s assessment of risk in the major risk-taking activities.
▪ The Chief Executive Officer is directly accountable to the
Board for all of BMO’s risk-taking activities. The management
committee structure, which supports the CEO, includes:
– the Risk Management Committee (and its sub-committees
dealing specifically with market risk, liquidity and funding
risk and operational risk issues); and
– the Counterparty Risk Council, which deals principally with
credit risk issues.
▪ The Head of Risk Management Group provides the Board with
comprehensive risk reporting and regular assessments of the
organization’s risks.
▪ Risk management units dedicated to each of BMO’s operat-
ing groups ensure that risk governance is applied effectively
through all levels of the organization.
▪ Risk management policies, standards and procedures are con -
tinually reviewed to ensure that they provide adequate and
effective governance and oversight of our risk-taking activities.
Effective Processes and Models
Rigorous processes are used throughout BMO to ensure the
consistent and effective management of risk through a control
framework. Processes are periodically reviewed by Corporate
Audit. The specific risk sections that follow outline risk manage-
ment processes in more detail.
The models used at BMO range from the very simple to those
that value complex transactions or involve sophisticated portfolio
and capital management methodologies. These models are used
to guide strategic decisions and to assist in making daily lending,
trading, underwriting, investment and operational decisions.
Effective models have also been developed for the measure-
ment of risk. BMO employs these models to measure exposure
to risk (credit, market, liquidity and funding, and operational)
and we measure the total risk on an integrated basis using the
Capital at Risk measure.
The Risk Management Group independently validates the
models used by the lines of business, their underlying assumptions
and their effectiveness in daily practice. Models are reviewed
according to a schedule that considers their complexity and
potential financial impact.
Qualified Risk Professionals
Sound Enterprise-Wide Risk Management relies upon the com-
petence and experience of our risk professionals to:
▪promote a strong culture that places high value on disciplined
and effective risk management processes and controls;
▪
adhere to established risk management standards for the
evaluation and acceptance of risk; and
▪ apply sound business judgment, using effective business mod-
els in our decision-making.
Integrated Risk Management
The management of risk is integrated with our management of
capital and strategy. This ensures that risks incurred in pursuit
of BMO’s strategic objectives are consistent with shareholders’
desired total returns, BMO’s desired credit rating and desired
risk levels, or risk appetite.
Two frameworks govern the integrated management of risk:
▪ The change management framework outlines processes to
ensure that changes to the organization’s risk profile associated
with new business initiatives are correctly identified, are con-
sistent with BMO’s strategic objective and receive appropriate
approvals before implementation; and
▪
The capital management framework ensures that risks arising
from business activities are captured in the economic capital
process (Capital at Risk) and are consistent with BMO’s
strategic objective.
ENTERPRISE-WIDE RISK MANAGEMENT
Enterprise-Wide Risk Management
Effective processes and models Qualified risk professionals
Comprehensive risk governance
Desired total
shareholder returns
Desired credit rating,
given target business mix
Enterprise Risk Appetite
Approved by the Board of Directors for each major
category of risk and delegated to management in the
lines of business through the Chief Executive Officer