Bank of Montreal 2002 Annual Report Download - page 32

28 BMO FINANCIAL GROUP ANNUAL REPORT 2002
Credit risk is the risk of loss due to the failure of a borrower, endorser,
guarantor or counterparty to repay a loan or honour another predetermined
financial obligation.
Capital at Risk (CaR) provides a single measure of risk that can be
compared across business activities and risk types. It is the foundation
for risk-based capital management and permits the cost of capital to be
charged to the lines of business.
Strategic risk is the risk that volumes will decrease or margins shrink
with no opportunity being available to offset the revenue declines with
a reduction in costs.
Management of risks on an integrated basis allows us to assess
the relative magnitude of risks taken and the distribution of
those risks across the organization’s activities. Integrated risk
management activities are supported by the use of Capital at Risk,
scenario analysis and stress testing.
Capital at Risk (CaR) i s the foundation for risk-based capital
management and permits the cost of capital to be charged
to the lines of business. CaR indicates, in terms of capital, the
magnitude of losses that could occur if adverse situations arise
and allows returns to be adjusted for risks.
Strategic risk is directly managed by the lines of business
through business strategies and initiatives based on their contri-
bution to shareholder value. Further enhancements to strategic
risk measurement are under development.
Integrated risk management is supported by the ongoing
development of enterprise-wide scenario analysis and stress
testing. These tools assist in the testing of extreme, but plausible,
political, economic, market and operational events in order to
ascertain their potential impacts on our operations.
New Basel Capital Accord
In 1988, the Basel Committee on Banking Supervision introduced
the original Basel Capital Accord which, together with the 1998
Basel Capital Accord, forms the basis for determining minimum
regulatory capital requirements for banks around the world.
The committee is now developing a new accord (referred to as
Basel II within the industry), which will:
▪be more risk-sensitive than the original accord;
▪provide a menu of approaches with incentives for better risk
management;
▪give greater emphasis to banks’ own internal methodologies;
and
▪
provide for increased regulatory supervision and more transpar-
ent disclosure of a bank’s risk profile and mitigation strategies.
BMO is supportive of this regulatory development and is working
closely with regulators and industry groups to assist in finalizing
the quantitative and qualitative aspects of Basel II. This regulatory
initiative aligns well with both BMO’s commitment to leadership
in risk management and its strategy of continual improvement in
risk management and capital management processes.
To ensure readiness for Basel II, BMO has established an
integrated enterprise-wide program with executive sponsorship
within the Risk Management Group. Leadership and oversight
are provided by an enterprise steering committee comprising
senior executives from all stakeholder groups. The program
leverages existing enterprise structures for change manage-
ment and business process improvement as well as established
technology strategies for data warehousing and knowledge
management. The program objectives are to:
▪identify the approach for regulatory capital calculation that is
most beneficial to shareholders;
▪meet regulatory requirements in a way that is fully integrated
with BMO’s risk and capital management framework; and
▪implement the necessary changes with the minimum disrup-
tion to BMO’s revenue-generating areas.
The program is on track and synchronized with the timeline
outlined by Basel II and our regulators.
BMO Financial Group views Basel II as an important step
in the alignment of regulatory and economic capital require-
ments. Furthermore, it should facilitate the ongoing evolution
and adoption of best practices for risk management throughout
the industry.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION
BMO incurs credit risk primarily in its lending activities. As
part of our enterprise-wide risk management framework, we
employ comprehensive governance and management processes
surrounding credit risk activities. These include:
▪ prudent credit granting and credit management through
corporate policies governing the philosophy, principles and
conduct of credit granting activities;
▪a well-developed limit-setting and monitoring process;
▪ oversight by senior governance committees, including the
Risk Review Committee of the Board of Directors, and the
Counterparty Risk Council; and
▪an independent credit risk oversight function within the Risk
Management Group.
Credit Risk

Total Capital at Risk
by Operating Group
(As at October 31, 2002)
IBG 51%
Corp 1%
P&C 40%
PCG 8%

Total Capital at Risk
by Risk Type
(As at October 31, 2002)
Strategic 11%
Operational 
24%
Credit 38%
Market 27%
