Bank of Montreal 2013 Annual Report Download - page 50

Subordinated Debt Purchase Plan is described in the Enterprise-Wide Capital Management
Subordinated debt decreased $0.1 billion. Further details on the composi- section that follows. Our Consolidated Statement of Changes in Equity on
tion of subordinated debt are provided in Note 17 on page 160 of the page 128 provides a summary of items that increase or reduce share-
financial statements. holders’ equity, while Note 20 on page 163 of the financial statements
provides details on the components of and changes in share capital.
Shareholders’ Equity Details of our enterprise-wide capital management practices and strat-
Shareholders’ equity increased $1.8 billion to $30.4 billion, reflecting egies can be found below.
growth in retained earnings. BMO’s Dividend Reinvestment and Share All 2010 and prior data is based on CGAAP in this section.
Enterprise-Wide Capital Management
As discussed below, BMO’s Basel III Common Equity Tier 1 Ratio of 9.9%
is strong, and in excess of regulatory requirements.
Objective
BMO is committed to a disciplined approach to capital management that
balances the interests and requirements of shareholders, regulators,
depositors and rating agencies. Our objective is to maintain a strong
capital position in a cost-effective structure that:
‰ is appropriate given our target regulatory capital ratios and internal
assessment of required economic capital;
‰ is consistent with our targeted credit ratings;
‰ underpins our operating groups’ business strategies; and
‰ supports depositor, investor and regulatory confidence while also
building long-term shareholder value.
Capital Management Framework
The principles and key elements of BMO’s capital management frame-
work are outlined in our capital management corporate policy and in our
annual capital plan, which includes the results of our Internal Capital
Adequacy Assessment Process (ICAAP).
ICAAP is an integrated process that evaluates capital adequacy on
both a regulatory and an economic capital basis, and is used to establish
capital targets and capital strategies that take into consideration the
strategic direction and risk appetite of the enterprise. The capital plan is
developed considering our ICAAP and in conjunction with our annual
business plan, promoting alignment between our business and risk
strategies, regulatory and economic capital requirements and the avail-
ability of capital. Regulatory and economic capital adequacy is assessed
by comparing capital supply (the amount of capital available to support
risks) to capital demand (the capital required to support the risks arising
from our business activities). Enterprise-wide stress testing and scenario
analysis are also used to assess the impact of various stress conditions
on BMO’s risk profile and capital requirements. The framework seeks to
ensure that we are adequately capitalized given the risks we take, and
supports the determination of limits, goals and performance measures
that are used to manage balance sheet positions, risk levels and capital
requirements at both the consolidated entity and line of business levels.
Assessments of actual and forecast capital adequacy are compared to
the capital plan throughout the year, and the capital plan is updated as
required, based on changes in our business activities, risk profile or
operating environment.
BMO uses a combination of regulatory and economic capital to
evaluate business performance and considers capital implications in its
strategic, tactical and transactional decision-making. By allocating our
capital supply to operating units and measuring their performance in
relation to the capital necessary to support the risks in their business,
we seek to optimize our risk-adjusted return to shareholders, while
maintaining a well-capitalized position. This approach aims to protect
our stakeholders from the risks inherent in our various businesses, while
still allowing the flexibility to deploy resources to strategic growth
activities of our operating groups. Capital in excess of what is required
to support our line of business activities is held in Corporate Services.
Capital Demand
Capital required
to support the
risks underlying
our business
activities
Capital Supply
Capital available
to support risks
Management
Actions
Capital adequacy
assessment of capital
demand and supply
For further discussion of the risks that arise from our business activities, refer to the Enterprise-Wide
Risk Management section on page 77.
Governance
The Board of Directors, either directly or in conjunction with its Risk
Review Committee, provides ultimate oversight and approval of capital
management, including our capital management corporate policy
framework, capital plan and capital adequacy assessments. The board
regularly reviews BMO’s capital position, key capital management activ-
ities and, with the Risk Review Committee, the ICAAP-determined
capital adequacy assessment results. The Balance Sheet and Capital
Management Committee provides senior management oversight,
including the review and discussion of significant capital management
policies, issues and activities and, along with the Risk Management
Committee, the capital required to support the execution of our
enterprise-wide strategy. Finance and Risk Management are responsible
for the design and implementation of the corporate policies and frame-
work related to capital, risk management and the ICAAP.
Risk-Weighted Asset Approaches
BMO primarily uses the Advanced Internal Ratings Based (AIRB)
Approach to determine credit risk-weighted assets (RWA) in our portfo-
lio, and the Standardized Approach to determine operational risk RWA.
Credit RWA arising from certain U.S. portfolios are determined using the
Standardized Approach. BMO’s market risk RWA are primarily
determined using the Internal Models Approach, but the Standardized
Approach is used for some exposures.
MD&A
BMO Financial Group 196th Annual Report 2013 61