Bank of Montreal 2010 Annual Report Download - page 89

MD&A
Long-term Wholesale Funding Sources ($ millions)
As at October 31 2010 2009 2008 2007 2006
Unsecured long-term
wholesale funding 14,198 21,756 35,274 21,628 16,840
Secured long-term
wholesale funding 5,883 4,162 4,396 – –
Mortgage and credit card
securitization issuances 26,906 28,047 25,077 12,992 9,792
Operational Risk
As a large and diversified financial services company, BMO is exposed to
potential loss arising from a variety of operational risks, including process
failure, theft and fraud, regulatory non-compliance, business disruption,
information security breaches and exposure related to outsourcing, as
well as damage to physical assets. Operational risk is inherent in all our
business activities, including the processes and controls used to manage
credit risk, market risk and all other risks we face. While operational risk
can never be fully eliminated, it can be managed to reduce exposure
to financial loss, reputational harm or regulatory sanction.
The three-lines-of-defence operating model establishes appropriate
accountability for operational risk management. The operating groups
are responsible for the day-to-day management of operational risk
in a manner consistent with enterprise-wide principles. Independent
risk management oversight is provided by Operating Group CROs,
Group Operational Risk Officers, Corporate Support areas and Enterprise
Operational Risk Manage ment. Operating Group CROs and Operational
Risk Officers independently assess group operational risk profiles,
identifying material exposures and potential weaknesses in controls and
recommending appropriate mitigation strategies and actions. Corporate
Support areas, including key areas such as Finance, Business Continuity,
Legal and Compliance, Human Resources and Technology, develop the
tools and processes to independently manage specialized operational
risks across the organization. Enterprise Operational Risk Management
establishes the Operational Risk Management Framework and Strategy
as well as the necessary governance framework.
Operational Risk Management Framework (ORMF)
The ORMF defines the processes we use to identify, measure, manage,
monitor and report key operational risk exposures. A primary objective
of the ORMF is to ensure that our operational risk profile is consistent
with our risk appetite and supported with adequate capital. The key
programs, methodologies and processes developed to support the
framework are highlighted below. Enhancements to the ORMF are
ongoing, giving due consideration to emerging industry and regulatory
guidance as detailed in the Basel II Capital Accord.
Risk and Control Self-Assessment (RCSA)
RCSA is an established process used by our operating groups to identify
the key risks associated with their business strategies and the controls
required for risk mitigation. The RCSA process provides a forward-looking
view of the impact of the business environment and internal controls
on operating group risk profiles. On an aggregate basis, RCSA results
provide a consolidated view of operational risks relative to risk appetite.
Key Risk Indicators (KRIs)
Operating groups and Corporate Support areas are required to identify KRIs
related to their material risks. KRIs are used to monitor operational risk
profiles and are linked to thresholds that trigger management action. KRIs
provide an early warning indicator of adverse changes in risk exposure.
Operational risk is the potential for loss resulting from
inadequate or failed internal processes or systems, human
interactions or external events, but excludes business risk.
Event Data Collection and Analysis
Internal loss data has been collected throughout the enterprise since
2004 and serves as an important means of measuring our operational
risk exposure and identifying risk mitigation opportunities. Loss data
is analyzed and benchmarked against external data and material trends
are reported to senior management and our Board of Directors on a
regular basis. BMO is a member of the Operational Risk Data Exchange,
an international association of banks that share loss data information
anonymously to assist in risk identification, assessment and modelling.
Capital Quantification
BMO uses The Standardized Approach (TSA) to determine Basel II
regulatory capital requirements for operational risk. TSA processes and
capital measures have been implemented at both the consolidated enter-
prise and applicable legal entity levels. The implementation of the Basel II
Advanced Measure
ment Approach is a priority for the enterprise and
will enable the quantification of operational risk capital using internal
models and loss-based methodologies.
Scenario Analysis and Stress Testing
Stress testing measures the potential impact of plausible operational,
economic, market and credit events on our operations and capital.
Scenario analysis provides management with a better understanding of
low-frequency, high-severity events and provides a gauge of enterprise
preparedness for events that could create risks that exceed our risk
appetite. Scenario analysis is an input in the calculation of operational
risk capital under the Advanced Measurement Approach.
Reporting
Regular reporting of our enterprise operational risk profile to senior
management and the board is an important element of our Operational
Risk Management Framework. Operational risk reporting supports risk
transparency and the proactive management of material operational
risk exposures.
Governance
Operational risk management is governed by a robust committee
structure as well as a comprehensive set of policies, standards and
operating guidelines. Operational Risk Committee (ORC), a sub-committee
of the Risk Manage ment Committee, is the main decision-making
committee for all operational risk management matters and has
oversight responsibility for operational risk strategy, management and
governance. ORC provides advice and guidance to the lines of business
on operational risk assessments, measurement and mitigation, and
related monitoring and change initiatives. ORC oversees the develop-
ment of policies, standards and operating guidelines that give effect to
the governing principles of the ORMF. These governance documents
incorporate industry best practices and are reviewed on a regular
basis to ensure they are current and consistent with our risk appetite.
Corporate Insurance Program
BMO’s corporate insurance program provides secondary mitigation of
certain operational risk exposures. We purchase insurance in amounts
that provide protection against unexpected material loss and when
insurance is required by law, regulation or contractual agreement.
Unsecured Long-term Wholesale Funding Maturities ($ millions)
As at October 31, 2010
Less than 1 to 2 to 3 to 4 to Over
1 year 2 years 3 years 4 years 5 years 5 years Total
3,483 2,884 2,067 525 2,130 3,109 14,198
BMO Financial Group 193rd Annual Report 2010 87