Bank of Montreal 2013 Annual Report Download - page 134

activities, we provide an indemnification to lenders against losses value of the securities borrowed. The collateral is revalued on a daily
resulting from the failure of the borrower to return loaned securities basis. The amount of securities loaned subject to indemnification was
when due. All borrowings are fully collateralized with cash or $4,778 million as at October 31, 2013 ($4,343 million in 2012). No
marketable securities. As securities are loaned, we require borrowers to amount was included in our Consolidated Balance Sheet as at
maintain collateral which is equal to or in excess of 100% of the fair October 31, 2013 and 2012 related to these indemnifications.
Note 8: Asset Securitization
Periodically, we securitize loans to obtain alternate sources of funding.
Securitization involves selling loans to trusts (“securitization vehicles”),
which buy the loans and then issue either interest bearing or discounted
investor certificates.
We use a bank securitization vehicle to securitize our Canadian
credit card loans. We are required to consolidate this vehicle. See Note 9
for further information. We also sell Canadian mortgage loans to third-
party Canadian securitization programs, including the Canadian Mortgage
Bond program, and directly to third-party investors under the National
Housing Act Mortgage-Backed Securities program.
Under these programs, we are entitled to the payment over time of
the excess of the sum of interest and fees collected from customers, in
connection with the loans that were sold, over the yield paid to
investors in the securitization vehicle or third-party securitization
program, less credit losses and other costs.
We assess whether the loans qualify for off-balance sheet
treatment based on the transfer of the risks and rewards.
The loans sold to third-party securitization programs or directly to
third parties do not qualify for off-balance sheet recognition as we have
determined that the transfer of these loans has not resulted in the
transfer of substantially all the risks and rewards, since we continue to
be exposed to substantially all of the prepayment, interest rate and/or
credit risk associated with the securitized financial assets. We continue
to recognize the loans in our Consolidated Balance Sheet, and we
recognize the instruments issued as a liability representing a secured
financing. The grouped payments received may be held on behalf of the
investors in the securitization vehicles or designated accounts until
principal payments are required to be made on the associated liabilities.
In order to compare all assets supporting the associated liabilities, the
payments held in the securitization vehicles or designated accounts on
behalf of the investors are added to the carrying value of the securitized
assets in the table below. The interest and fees collected, net of the
yield paid to investors is recorded in net interest income using the
effective interest method over the term of the securitization. Credit
losses associated with the loans are recorded in the provision for credit
losses. During the year ended October 31, 2013, we sold $6,704 million
of loans to third-party securitization programs which does not include
amounts that were transferred and repurchased during the year
($6,548 million in 2012).
The following table shows the carrying amounts related to securitization activities with third parties that are recorded on our Consolidated Balance
Sheet, together with the associated liabilities, for each category of asset on the balance sheet:
(Canadian $ in millions) 2013 (1) 2012
Carrying
amount of
assets
Associated
liabilities
Carrying
amount of
assets
Associated
liabilities
Available-for-sale securities
Residential mortgages – 9,956 428 9,020
Other related assets (2) 9,956
8,660 9,448 11,105
Total 18,616 18,235 20,553 20,312
(1) The fair value of the securitized assets is $18,687 million and the fair value of the associated
liabilities is $18,454 million, for a net position of $233 million. Securitized assets are those
which we have transferred to third parties, including other related assets.
(2) Other related assets represent payments received on account of loans pledged under
securitization that have not been applied against the associated liabilities. The payments
received are held on behalf of the investors in the securitization vehicles until principal
payments are required to be made on the associated liability. In order to compare all assets
supporting the associated liability, this amount is added to the carrying value of the
securitized assets in the above table.
Certain comparative figures have been reclassified to conform with the current year’s presentation.
Note 9: Special Purpose Entities
We enter into certain transactions in the ordinary course of business
which involve the establishment of special purpose entities (“SPEs”) to
facilitate or secure customer transactions and to obtain alternative
sources of funding. We are required to consolidate a SPE if we control
the entity. The following circumstances are considered when assessing
whether we, in substance, control the SPE and consequently are
required to consolidate:
‰ the activities of the SPE are being conducted on our behalf according
to our specific business needs so that we obtain benefits from the
SPE’s operations;
‰ we have the decision-making powers necessary to obtain the majority
of the benefits of the activities of the SPE or, by setting up an
“autopilot” mechanism, we have delegated these decision-making
powers;
‰ we have rights to obtain the majority of the benefits of the SPE and
therefore may be exposed to risks incidental to the activities of the
SPE; or
‰ we retain the majority of the residual or ownership risks related to
the SPE or its assets in order to obtain benefits from its activities.
We consider all aspects of the relationship between us and the SPE to
determine whether we ultimately have the power to govern the
financial and operating policies of the SPE, so as to obtain the majority
of the benefits from the SPE’s activities.
We perform a re-assessment of consolidation whenever there is a
change in the substance of the relationship.
Notes
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