Bank of Montreal 2010 Annual Report Download - page 91

MD&A
Strategic risk arises from: external risks inherent in the business
environment within which BMO operates and the risk of potential loss
if BMO is unable to deal with those external risks effectively. While
external strategic risks – including economic, political, regulatory,
technological, social and competitive risks – cannot be controlled,
the likelihood and magnitude of their impact can be mitigated through
an effective strategic risk management process.
BMO’s Office of Strategic Management (OSM) oversees the
governance and management processes for identifying, monitoring
and mitigating strategic risks across the enterprise. A rigorous strategic
management process incorporates a consistent approach to the
Strategic risk is the potential for loss due to fluctuations in
the external business environment and/or failure to properly
respond to these fluctuations due to inaction, ineffective
strategies or poor implementation of strategies.
devel opment of strategies and incorporates accurate and comprehensive
financial information linked to financial commitments.
The OSM works with the lines of business and key corporate stake-
holders during the strategy development process to promote consistency
and adherence to strategic management standards. Included in this
process is a review of the changing business environment within
which each of our lines of business operates, including broad industry
trends and the actions of our competitors. Strategies are reviewed
with the Management Committee and the Board of Directors annually
in interactive sessions designed to challenge assumptions and strategies
in light of current and potential future environments.
Performance commitments established through the strategic
management process are regularly monitored and are reported upon
quarterly, using both leading and lagging indicators of performance,
so that strategies can be reviewed and adjusted when necessary.
Regular strategic and financial updates are also monitored closely
to identify any significant issues.
Strategic Risk
•
capital and stress testing models for measuring capital, allocating
capital and managing
Regulatory Capital and Economic Capital;
• fiduciary models for asset allocation, asset optimization and portfolio
management;
• major business strategy models to forecast the possible outcomes
of new strategies in support of our business decision process; and
• models driven by regulatory and other stakeholder requirements.
Prior to use, models are subject to review under the Model Risk
Corporate Standard by our Model Risk and Vetting group. The Model Risk
Corporate Standard outlines minimum requirements for the identification,
assessment, monitoring and management of models and model risk
throughout the enterprise. All models are rated according to their risk
levels, which determine the frequency of ongoing review. In addition to
regularly scheduled model validation and vetting, model risk monitoring
and oversight activities are in place so that models are managed,
used and perform as expected, thereby increasing the likelihood of
early detection of emerging issues.
During the current year, BMO’s enterprise-wide Model Risk
Management Framework was enhanced with additional emphasis on
end-to-end stakeholder governance, including the establishment of
a Model Risk Management Forum, a cross-functional group in which all
stakeholders (model users, model owners and the Model Risk and Vetting
Group) provide their input into the development, implementation and
maintenance of the model risk framework and processes covering all
models that are in use across the enterprise.
The operating groups are responsible for the day to day management
of their regulatory risk in a manner consistent with enterprise-wide
policies. Legal, Corporate and Compliance Group (LCCG) provides
independent risk management oversight through Deputy General
Counsel and Chief Compliance Officers with designated operating group
responsibility. These legal and compliance officers independently assess
risk profiles, assist in identifying material control weaknesses and
recommend mitigation strategies and actions. LCCG establishes the
legal and compliance enterprise risk management framework, as well
as the necessary governance framework.
Regulatory risk is the risk of not complying with regulatory
requirements, regulatory changes or regulators’ expectations.
Failing to properly manage regulatory risk may result in regulatory
sanctions being imposed, and could harm our reputation.
Regulation of the financial sector has received heightened attention
during the past year, as new rules were proposed and enacted to reform
regulatory and capital requirements. Significant developments included
the enactment of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act) in the United States and adoption of
the International Regulatory Framework for Banks (Basel III). The Dodd-
Frank Act is broad in scope and requires development of many new
rules and regulations. It will be phased in over a period of several years.
We continue to assess the impact these developments will have on
our operations.
During the past year we have undertaken a great deal of work in
regards to Basel III. While there are uncertainties surrounding the Basel
proposals, which will be addressed in the upcoming years, given the
strength of our capital and liquidity positions, we believe that we are
well positioned to adopt the known regulatory changes.
Further information on our approach to the adoption of Basel III
can be found in the Capital Management section on page 59, and the
Liquidity and Funding section on page 85.
Regulatory Risk
BMO Financial Group 193rd Annual Report 2010 89