Bank of Montreal 2010 Annual Report Download - page 172

170 BMO Financial Group 193rd Annual Report 2010
GLOSSARY
Allowance for Credit Losses
represents an amount deemed
adequate by management to absorb
credit-related losses on loans and
acceptances and other credit instru-
ments. Allowances for credit losses
can be specific or general and are
recorded on the balance sheet as a
deduction from loans and acceptances
or, as they relate to credit instruments,
as other liabilities.
P 37, 81, 120
Assets under Administration
and under Management refers to
assets administered or managed by
a financial institution that are benefi-
cially owned by clients and therefore
not reported on the balance sheet
of the administering or managing
financial institution.
Asset-Backed Commercial Paper
(ABCP) is a short-term investment
with a maturity that is typically less
than 180 days. The commercial paper
is backed by physical assets such
as trade receivables, and is generally
used for short-term financing needs.
Assets-to-Capital Multiple is
defined as assets plus guarantees
and letters of credit, net of specified
deductions (or adjusted assets),
divided by total capital.
Average Earning Assets represents
the daily or monthly average balance
of deposits with other banks and loans
and securities, over a one-year period.
Bankers’ Acceptances (BAs) are
bills of exchange or negotiable
instruments drawn by a borrower for
payment at maturity and accepted
by a bank. BAs constitute a guarantee
of payment by the bank and can
be traded in the money market.
The bank earns a “stamping fee”
for providing this guarantee.
Basis Point: One one-hundredth
of a percentage point.
Business Risk arises from the specific
business activities of a company
and the effects these could have
on its earnings.
P 88
Credit and Counterparty Risk is the
potential for loss due to the failure
of a borrower, endorser, guarantor
or counterparty to repay a loan or
honour another predetermined
financial obligation.
P 80
Derivatives are contracts whose
value is “derived” from movements
in interest or foreign exchange rates,
or equity or commodity prices.
Derivatives allow for the transfer,
Forwards are customized contracts
transacted in the over-the-counter
market. Futures are transacted in
standardized amounts on regulated
exchanges and are subject to daily
cash margining.
P 130
General Allowance is maintained
to cover impairment in the existing
credit portfolio that cannot yet be
associated with specific credit assets.
Our approach to establishing and
maintaining the general allowance is
based on the guideline issued by our
regulator, OSFI. The general allowance
is reviewed on a quarterly basis and
a number of factors are considered
when determining its appropriate
level. We employ a general allowance
model that applies historical expected
and unexpected loss rates, based on
probabilities of default and loss given
default factors, to current balances.
P 40, 81, 120
Hedging is a risk management tech-
nique used to neutralize or manage
interest rate, foreign currency, equity,
commodity or credit exposures arising
from normal banking activities.
Impaired Loans are loans for
which there is no longer reasonable
assurance of the timely collection
of principal or interest.
Innovative Tier 1 Capital: OSFI
allows banks to issue instruments that
qualify as “Innovative” Tier 1 capital.
In order to qualify, these instruments
must be issued indirectly through a
special purpose vehicle, be perma-
nent in nature and receive acceptable
accounting treatment. Innovative
Tier 1 capital cannot comprise more
than 20% of net Tier 1 capital, at time
of issue, with 15% qualifying as Tier 1
capital and the remaining 5% included
in total capital.
Insurance Risk is the risk of loss
due to actual experience being
different than that assumed when
an insurance product was designed
and priced.
Insurance risk exists
in all our insurance businesses,
including annuities and life,
accident
and sickness, and creditor insurance,
as well as our reinsurance business.
Issuer Risk arises in BMO’s trading
and underwriting portfolios, and
measures the adverse impact of credit
spread, credit migration and default
risks on the market value of fixed
income instruments and similar
securities. Issuer risk is measured
at a 99% confidence level over a
specified holding period.
P 82
modification or reduction of current or
expected risks from changes in rates
and prices.
Dividend Payout Ratio: Common
dividends as a percentage of
net income after preferred share
dividends.
Earnings Per Share (EPS) is
calculated by dividing net income,
after deduction of preferred dividends,
by the average number of common
shares outstanding. Diluted EPS,
which is our basis for measuring
performance, adjusts for possible
conversions of financial instruments
into common shares if those
conversions would reduce EPS.
P 33, 156
Earnings Volatility (EV) is a measure
of the adverse impact of potential
changes in market parameters on
the projected 12-month after-tax
net income of a portfolio of assets,
liabilities and off-balance sheet posi-
tions, measured at a 99% confidence
level over a specified holding period.
P 82
Economic Capital is our internal
assessment of the risks underlying
BMO’s business activities. It represents
management’s estimation of the
likely magnitude of economic losses
that could occur if adverse situations
arise, and allows returns to be
adjusted for risks. Economic capital
is calculated for various types of
risk – credit, market (trading and non-
trading), operational and business –
where measures are based on a time
horizon of one year. (For further dis-
cussion of these risks, refer to the
Enterprise-Wide Risk Management
section on page 75.) Economic capital
is a key element of our risk-based
capital management process.
P 34, 91
Environmental Risk is the risk of
loss or damage to BMO’s reputation
resulting from environmental concerns
related to BMO or its customers.
Environmental risk is often associated
with credit and operational risk.
P 90
Fair Value is the amount of consider-
ation that would be agreed upon in
an arm’s length transaction between
knowledgeable, willing parties who
are under no compulsion to act.
Forwards and Futures are contractual
agreements to either buy or sell
a specified amount of a currency,
commodity, interest-rate-sensitive
financial instrument or security at a
specific price and date in the future.
Liquidity and Funding Risk is
the potential for loss if BMO is unable
to meet financial commitments in a
timely manner at reasonable prices as
they fall due. Financial commitments
include liabilities to depositors and
suppliers, and lending, investment
and pledging commitments.
P 85, 124
Mark-to-Market represents the
valuation of securities and derivatives
at market rates as of the balance
sheet date, where required by
accounting rules.
Market Risk is the potential for a
negative impact on the balance sheet
and/or income statement resulting
from adverse changes in the value
of financial instruments as a result of
changes in certain market variables.
These variables include interest rates,
foreign exchange rates, equity and
commodity prices and their implied
volatilities, as well as credit spreads,
credit migration and default.
P 82, 124
Market Value Exposure (MVE) is a
measure of the adverse impact of
changes in market parameters on the
market value of a portfolio of assets,
liabilities and off-balance sheet posi-
tions, measured at a 99% confidence
level over a specified holding period.
The holding period considers current
market conditions and the composition
of the portfolios to determine how
long it would take to neutralize the
market risk without adversely affecting
market prices. For trading and under-
writing activities, MVE is comprised of
Value at Risk and Issuer Risk.
P 82
Model Risk is the potential loss due
to the risk of a model not performing
or capturing risk as designed. It also
arises from the possibility of the
use of an inappro priate model or
the inappropriate use of a model.
Net Economic Profit (NEP) represents
cash net income available to common
shareholders, less a charge for
capital. NEP is an effective measure
of economic value added. NEP is a
non-GAAP measure.
P 34, 91
Net Interest Income is comprised
of earnings on assets, such as loans
and securities, including interest and
dividend income and BMO’s share of
income from investments accounted
for using the equity method of
accounting, less interest expense
paid on liabilities, such as deposits.
P 37
Glossary of Financial Terms