Bank of Montreal 2003 Annual Report Download - page 50

Management’s Discussion and Analysis of Operations and Financial Condition
BMO Financial Group 186th Annual Report 200346
Individual risk committees have responsibility for establishing
and monitoring comprehensive risk management limits con-
sistent with the Board limits. Loss limits are also in place to
provide an early warning mechanism to effectively address
potential loss situations. In each line of business, management
ensures that governance activities, management processes
and controls are consistent with risk management policies and
corporate standards.
Effective Processes and Models
Rigorous processes, periodically reviewed by Corporate Audit,
are used across BMO to:
▪develop policies and limits for approval by senior governance
committees;
▪monitor policy compliance;
▪maintain contingency plans;
▪track variables continuously for changing risk conditions; and
▪provide timely reports to senior management and the appro-
priate governance committees.
The models used 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, funding, investment and operational
decisions. Models have also been developed to measure exposure
to risk and to measure total risk on an integrated basis using
capital at risk (CaR). We have strong controls over the develop-
ment, implementation and application of these models, which
are subject to a periodic independent model risk vetting process.
BMO also utilizes various processes and models, within risk
types as appropriate and feasible, to:
▪assess the correlation of credit risks before authorizing new
exposures;
▪
measure and value our portfolio exposures and calculate the
related market risk exposure;
▪determine the business and operational risk for each line of
business; and
▪
project liquidity and funding risk based on expected and
stressed operating conditions.
Qualified Risk Professionals
Sound enterprise-wide risk management relies upon the com-
petence and experience of our risk professionals to:
▪
promote a 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
models in our decision-making.
In order to enhance our existing capabilities, a new risk educa-
tion program curriculum was developed through a partnership
between BMO and York University’s Schulich School of Business.
This certificate program promotes the development of risk
professionals by providing a comprehensive view of all aspects
of risk identification and management in banking practice.
It consists of five modules, each equivalent to a full semester
graduate course, and is delivered to BMO managers by the
Executive Education Centre at Schulich and BMO risk execu-
tives who are subject matter experts.
Additionally, risk managers and lenders may be required to
complete a progressive curriculum of credit courses through
BMO’s Institute for Learning in order to achieve credit quali-
fication for their role. These courses, together with defined
job exposures, provide training and practice in sound lending
that lead to the granting of appropriate lending limits to qual-
ified professionals.
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 desired total
shareholder return as well as BMO’s desired credit rating and
risk levels, or risk appetite.
Desired total
shareholder return
Desired credit rating,
given target business mix
BMO’s 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 CEO
Tw o f r a m e wo r k s s upport the management of risk: change manage-
ment and integrated risk management. They are designed to:
▪
ensure that changes to the organization’s risk profile associated
with new business initiatives are correctly identified and re-
ceive appropriate approvals before implementation; and
▪assess the relative magnitude of risks taken and the distribu-
tion of those risks across the organization’s activities.
Integrated risk management activities are supported by the use of
capital at risk (CaR) measures, scenario analysis and stress testing.
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. CaR indicates, in terms of
capital, the likely magnitude of losses that could occur if adverse
situations arise, and allows returns to be adjusted for risks. As
noted in the charts below, BMO’s largest exposure is credit risk.
Total Capital at Risk
by Operating Group
(as at October 31, 2003)
IBG 48%
Corp 2%
P&C 41%
PCG 9%
Total Capital at Risk
by Risk Type
(as at October 31, 2003)
Business 15%
Operational
23%
Credit 35%
Market 27%