Bank of Montreal 2013 Annual Report Download - page 180

Model Risk is the potential for loss
due to the risk of a model not per-
forming or capturing risk as
designed. It also arises from the
possibility of the use of an
inappropriate model or the
inappropriate use of a model.
Page 96
Net Economic Profit (NEP) repre-
sents net income available to
common shareholders, before
deduction for the after-tax impact of
the amortization of acquisition-
related intangible assets, less a
charge for capital. Adjusted NEP is
computed using adjusted net income.
NEP is considered a reasonable
measure of added economic
value. NEP and adjusted NEP are
non-GAAP measures.
Page 36
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.
Page 39
Net Interest Margin is the ratio of
net interest income to average
earning assets, expressed as a per-
centage or in basis points. Net
interest margin is sometimes com-
puted using total assets.
Page 39
Notional Amount refers to the
principal used to calculate interest
and other payments under derivative
contracts. The principal amount does
not change hands under the terms of
a derivative contract, except in the
case of cross-currency swaps.
Off-Balance Sheet Financial
Instruments include a variety of
financial arrangements offered to
clients, which include credit
derivatives, written put options,
backstop liquidity facilities, standby
letters of credit, performance
guarantees, credit enhancements,
commitments to extend credit, secu-
rities lending, documentary and
commercial letters of credit, and
other indemnifications.
Office of the Superintendent of
Financial Institutions Canada (OSFI)
is the government agency respon-
sible for regulating banks, insurance
companies, trust companies, loan
companies and pension plans
in Canada.
Operating Leverage is the differ-
ence between revenue and expense
growth rates. Adjusted operating
leverage is the difference between
adjusted revenue and adjusted
expense growth rates.
Page 27
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.
Page 94
Options are contractual agreements
that convey to the buyer the right
but not the obligation to either buy
or sell a specified amount of a
currency, commodity, interest-rate-
sensitive financial instrument or
security at a fixed future date or
at any time within a fixed
future period.
Page 148
Provision for Credit Losses is a
charge to income that represents an
amount deemed adequate by
management to fully provide for
impairment in a portfolio of loans
and acceptances and other credit
instruments, given the composition
of the portfolio, the probability of
default, the economic environment
and the allowance for credit losses
already established.
Pages 42, 84, 137
Reputation Risk is the risk of a
negative impact on BMO that results
from the deterioration of BMO’s
reputation. Potential negative
impacts include revenue loss,
decline in client loyalty, litigation,
regulatory sanction or additional
oversight or declines in BMO’s
share price.
Page 98
Return on Equity or Return on
Common Shareholders’ Equity
(ROE) is calculated as net income,
less non-controlling interest in
subsidiaries and preferred dividends,
as a percentage of average common
shareholders’ equity. Common
shareholders’ equity is comprised of
common share capital, contributed
surplus, accumulated other compre-
hensive income (loss) and retained
earnings. Adjusted ROE is calculated
using adjusted net income.
Page 36
Risk-Weighted Assets (RWA) are
defined as on- and off-balance
sheet exposures, which are risk-
weighted based on counterparty,
collateral, guarantee arrangements
and possibly product and term for
capital management and regulatory
reporting purposes.
Page 61
Securities Borrowed or Purchased
under Resale Agreements are
low-cost, low-risk instruments,
often supported by the pledge
of cash collateral, which arise
from transactions that involve
the borrowing or purchasing
of securities.
Securities Lent or Sold under
Repurchase Agreements are
low-cost, low-risk liabilities, often
supported by cash collateral, which
arise from transactions that involve
the lending or selling of securities.
Securitization is the practice of
selling pools of contractual debts,
such as residential mortgages,
commercial mortgages, auto loans
and credit card debt obligations, to
third parties.
Page 145
Special Purpose Entities (SPEs)
include entities created to accom-
plish a narrow and well-defined
objective. We are required to con-
solidate an SPE if we control the SPE
by having the power to govern the
financial and operating policies of
the SPE so as to obtain benefits from
the SPE’s activities.
Pages 70, 71, 145
Specific Allowances reduce the
carrying value of specific credit
assets to the amount we expect to
recover if there is evidence of
deterioration in credit quality.
Pages 42, 85, 137
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.
Page 98
Stressed Value at Risk (SVaR) is
measured for specific classes of risk
in BMO’s trading and underwriting
activities: interest rate, foreign
exchange rate, credit spreads, equity
and commodity prices and their
implied volatilities, where model
inputs are calibrated to historical
data from a period of significant
financial stress. This measure calcu-
lates the maximum loss likely to be
experienced in the portfolios, meas-
ured at a 99% confidence level over
a specified holding period.
Page 87
Swaps are contractual agreements
between two parties to exchange a
series of cash flows. The various
swap agreements that we enter into
are as follows:
• Commodity swaps – counterparties
generally exchange fixed-rate and
floating-rate payments based on
a notional value of a single
commodity.
• Credit default swaps – one counter-
party pays the other a fee in
exchange for that other counter-
party agreeing to make a payment
if a credit event occurs, such as
bankruptcy or failure to pay.
• Cross-currency interest rate
swaps – fixed-rate and floating-rate
interest payments and principal
amounts are exchanged in
different currencies.
• Cross-currency swaps – fixed-rate
interest payments and principal
amounts are exchanged in
different currencies.
• Equity swaps – counterparties
exchange the return on an equity
security or a group of equity secu-
rities for the return based on a
fixed or floating interest rate or the
return on another equity security or
group of equity securities.
• Interest rate swaps – counter-
parties generally exchange fixed-
rate and floating-rate interest
payments based on a notional
value in a single currency.
Page 147
Taxable Equivalent Basis (teb):
Revenues of operating groups
reflected in our MD&A are presented
on a taxable equivalent basis (teb).
To facilitate comparisons, the teb
adjustment increases reported
revenues and the provision for
income taxes by an amount that
would increase revenues on certain
tax-exempt securities to a level that
would incur tax at the statutory rate.
Page 175
Tier 1 Capital is primarily comprised
of CET1, preferred shares and other
qualifying or grandfathered non-
common equity capital, net of cer-
tain deductions.
Tier 1 Capital Ratio reflects Tier 1
capital divided by risk-weighted
assets.
Pages 62, 165
Total Capital includes Tier 1 and
Tier 2 capital. Tier 2 capital is
primarily comprised of subordinated
debentures and a portion of the
collective allowance for credit
losses, net of certain deductions.
Total Capital Ratio reflects total
capital divided by risk-weighted
assets.
Pages 62, 165
Total Shareholder Return: The
three-year and five-year average
annual total shareholder return
(TSR) represents the average annual
total return earned on an invest-
ment in BMO common shares made
at the beginning of a three-year and
five-year period, respectively. The
return includes the change in share
price and assumes that dividends
received were reinvested in addi-
tional common shares. The one-year
TSR also assumes that dividends
were reinvested in shares.
Page 33
Trading-Related Revenues include
net interest income and
non-interest revenue earned from
on- and off-balance sheet positions
undertaken for trading purposes.
The management of these positions
typically includes marking them to
market on a daily basis. Trading-
related revenues include income
(expense) and gains (losses) from
both on-balance sheet instruments
and interest rate, foreign exchange
(including spot positions), equity,
commodity and credit contracts.
Page 41
Value at Risk (VaR) is measured for
specific classes of risk in BMO’s
trading and underwriting activities:
interest rate, foreign exchange rate,
credit spreads, equity and
commodity prices and their implied
volatilities. This measure calculates
the maximum loss likely to be
experienced in the portfolios,
measured at a 99% confidence level
over a specified holding period.
Page 87
BMO Financial Group 196th Annual Report 2013 191