Bank of Montreal 2004 Annual Report Download - page 69

BMO Financial Group Annual Report 2004 65
MD&A
Liquidity from cash and securities is supplemented by secu-
rities purchased under resale agreements, which also can be
readily converted into cash or cash substitutes to meet financial
commitments. Securities purchased under resale agreements
totalled $17.1 billion at the end of the year, up from $13.3 billion
in 2003.
In the ordinary course of business, a portion of cash,
securities and securities purchased under resale agreements is
pledged as collateral to support trading activities and participa-
tion in clearing and payment systems, in Canada and abroad.
At October 31, 2004, $18.8 billion of cash and securities had
been pledged, which is in line with $18.7 billion pledged a year
earlier. At October 31, 2004, $13.7 billion of securities purchased
under resale agreements had been pledged, an increase from
$10.4 billion pledged a year earlier. In addition, BMO is a party
to certain agreements that could require incremental collateral
under certain circumstances. These potential incremental col-
lateral requirements are not material. Additional information
on cash and securities can be found in Table 5 on page 71 and
in Notes 2 and 3 on page 88 of the financial statements.
The second measure is the core deposits-to-total deposits
ratio. This measure provides an assessment of the stability
of BMO’s deposit base, as core deposits are more stable
than other deposit sources. Core deposits are comprised of
operating deposits and smaller fixed-date deposits, which
generally are less responsive to changes in the market environ-
ment than larger fixed-date deposits. The ratio represents
total deposits less fixed-date deposits greater than 100,000 units
of any currency as a percentage of total deposits. BMO’s core
deposits-to-total deposits ratio at October 31, 2004 was 58.2%,
up from 57.1% in the prior year. The ratio increased as core
deposits grew while non-core deposits remained stable. Growth
in core deposits was used to fund growth in loans.
Core deposits totalled $101.9 billion at the end of the year,
up from $98.0 billion in 2003, while total deposits increased
$3.6 billion to $175.2 billion. Our large base of core deposits,
along with our strong capital base, reduces reliance on
less stable wholesale funding. Wholesale funding is largely
short-term in nature and primarily supports trading and
underwriting assets and investment securities. Wholesale
funding is diversified by customer, type, market, maturity
term, currency and geography.
Information on deposit maturities can be found in Table 24
on page 81.
Our liquidity and funding position could potentially be
affected by off-balance sheet arrangements and other credit
instruments through our obligation to fund drawdowns.
These exposures are captured within our risk management
framework. Off-balance sheet arrangements are discussed
on page 53. Information on other credit instruments can be
found in Note 5 on page 93 of the financial statements.
Cash and Securities as a % of
Total Assets
27.8
23.1
24.9
29.1
25.8
20042003200220012000
Core Deposits as a % of
Total Deposits
56.8
60.0 59.6
57.1
58.2
20042003200220012000
Operational risk is inherent in all business activities. Although
operational risk can never be entirely eliminated, shareholder
value can be preserved and enhanced by managing, mitigating,
and in some cases insuring against operational risk. To achieve
this goal, we have developed, using regulatory guidelines,
an Operational Risk Framework, which includes identification,
measurement, analysis, monitoring, capital at risk attribution,
and risk control/mitigation elements. A variety of underlying
processes and controls have been developed as part of this
framework. These include risk and control self-assessments,
business contingency plans, event management, change man-
agement and outsourcing, acquisition and integration
management.
BMO’s operational risk governance structure includes the
Operational Risk Committee (ORC), a sub-committee of RMC.
The ORC has oversight responsibility for operational risk
strategy and governance. It provides advice and guidance
to the lines of business on operational risk assessments,
measurement and mitigation, and related monitoring and
change initiatives.
Each line of business is responsible for managing its opera-
tional risk within the guidelines established by corporate policy
and standards, using the aforementioned framework processes
and control programs. To ensure that all operational risks to
which a line of business is exposed are adequately managed,
specialized functions such as Finance, Taxation, Legal,
Compliance, Privacy, Human Resources and Systems and
Information Management are also involved in the measurement
process, as appropriate. An independent Enterprise
Operational Risk Management unit exists within ER&PM.
BMO purchases insurance in such amounts and in such
areas as will provide protection against unexpected material
loss and where insurance is required by law, regulatory
requirement or contractual agreement.
Operational risk is the potential for loss resulting from inadequate or
failed internal processes or systems, human error or external events
not related to credit, market or liquidity risks. Operational risk includes
fiduciary risk, legal risk and business risk due to operational failure, but
excludes business risks of a strategic nature such as business risk due
to earnings volatility.
Operational Risk
The cash and securities-to-total assets
ratio reflects a sound liquidity position.
Core deposits represent a stable
source of funding.