Bank of Montreal 2013 Annual Report Download - page 58

U.S. Regulatory Developments
On July 21, 2010, U.S. President Obama signed into law the Dodd-Frank
Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act).
The Dodd-Frank Act is broad in scope and the reforms include height-
ened consumer protection, regulation of the over-the-counter
derivatives markets, restrictions on proprietary trading and sponsorship
of private investment funds by banks (referred to as the Volcker Rule),
imposition of heightened prudential standards and broader application
of leverage and risk-based capital requirements. The reforms also
include greater supervision of systemically significant payment, clearing
or settlement systems, restrictions on interchange fees, and the creation
of a new financial stability oversight council of regulators with the
objective of increasing stability by monitoring systemic risks posed by
financial services companies and their activities. Many provisions of the
Dodd-Frank Act continue to be subject to rulemaking and will take effect
over several years, making it difficult to anticipate at this time the
overall impact on BMO or the financial services industry as a whole. As
rulemaking evolves, we are continually monitoring developments to
ensure we are well-positioned to respond to and implement any
required changes. We anticipate an increase in regulatory compliance
costs, and will be focused on managing the complexity and breadth of
the regulatory changes.
The Volcker Rule, which prohibits banking entities and their affili-
ates from certain proprietary trading and specified relationships with
hedge funds and private equity funds, is currently in proposed form. The
U.S. federal banking agencies, the Securities and Exchange Commission
and the Commodity Futures Trading Commission have confirmed that
banking entities have two years from July 21, 2012, to conform all of
their activities and investments, or longer if the period is extended.
Banking entities are expected to engage in good-faith planning efforts
and work toward compliance during this period.
In addition, under the Dodd-Frank Act, most over-the-counter
derivatives are now subject to a comprehensive regulatory regime.
Certain derivatives are now required to be centrally cleared, traded on
an exchange and are subject to reporting and business conduct
requirements. Capital and margin requirements relating to derivatives
are currently being considered by U.S. and international regulators.
The Consumer Financial Protection Bureau, which enforces U.S.
federal consumer finance laws, has stated that it will closely scrutinize
indirect auto lenders to focus on compliance, including with fair
lending laws.
The Board of Governors of the Federal Reserve System (FRB) has
issued for comment a proposed rulemaking (the Proposed Rule) that
would implement the Dodd-Frank Act’s enhanced prudential standards
and early remediation requirements for the U.S. operations of non-U.S.
banks, such as BMO. The Proposed Rule would establish new require-
ments relating to risk-based capital, leverage limits, liquidity standards,
risk-management frameworks, concentration and credit exposure limits,
resolution planning and credit exposure reporting.
The U.S. federal banking agencies have issued a proposal that
would implement in the U.S. the Basel III liquidity coverage ratio (LCR).
The LCR requires banking organizations to maintain high-quality liquid
assets in an amount sufficient to withstand a standardized liquidity
stress scenario. The proposed effective date is January 1, 2015, when a
two-year phase-in period would commence. The proposal is subject to a
public comment period that is scheduled to close January 31, 2014.
BMO is currently assessing and preparing for the impact of these
proposed rules on its operations.
As a bank holding company with total consolidated assets of
US$50 billion or more, our U.S. subsidiary BMO Financial Corp. (BFC) was
subject to the Capital Plan Review (CapPR) rules and processes in
fiscal 2013, under which BFC participated in an annual stress testing and
capital planning exercise conducted by the FRB. BFC was required to
demonstrate an ability to maintain a Tier 1 Common Ratio(1) of 5% or
more and meet or exceed minimum required capital ratios, after consid-
ering its planned capital actions under a company-developed adverse
scenario and a supervisory-prescribed severely adverse scenario. Pur-
suant to these requirements, BFC submitted a two-year capital plan to
the FRB in January 2013. The FRB informed BFC in March 2013 that it did
not object to the capital actions contained within BFC’s 2013 capital
plan. BFC’s wholly owned principal banking subsidiary, BMO Harris Bank
N.A. (BHB), was subject to similar capital planning requirements by the
Office of the Comptroller of the Currency (OCC).
In fiscal 2014, BFC will be subject to the FRB’s annual Compre-
hensive Capital Analysis and Review (CCAR) and mid-year Dodd-Frank
Act (DFAST) stress testing rules and processes, while BHB will be subject
to the OCC’s DFAST annual and mid-year stress testing requirements.
CCAR requirements are expected to be more stringent than CapPR, and
will continue to require BFC to demonstrate an ability to meet the appli-
cable minimum capital requirements, including a Basel I Tier 1 Common
Ratio of 5% and the transitional U.S. Basel III Capital Ratio requirements
in effect in 2015, including a 4.5% Common Equity Tier 1 Ratio1. Similar
to the CapPR process, the capital plan BFC submits in January 2014 will
be subject to supervisory review, and a decision on whether the
planned capital actions contained in its 2014 capital plan are approved is
expected by March 31, 2014; however, unlike the results of the CapPR
process, the FRB will disclose its own CCAR stress test results for BFC
under its supervisory adverse and severely adverse scenarios. In addi-
tion, BFC and BHB are also required to disclose the results of their
testing under the supervisory scenarios in March 2014. Under the DFAST
rules, BFC and BHB are required to execute mid-year company-run stress
tests commencing in 2014. BFC and BHB are expected to develop base-
line, adverse and severely adverse scenarios, submit the stress test
results to the FRB and the OCC in July 2014, and disclose them in
September 2014.
In July 2013, U.S. regulators finalized comprehensive changes to
U.S. capital requirements by adopting the Basel III risk-based capital
standards. The U.S. Basel III rules will be effective for BFC and BHB on
January 1, 2015. BFC and BHB will be subject to the rules on U.S. Basel III
capital and the standardized approach to risk-weighting assets, and
have initiated activities to implement these rules. BFC and BHB are well-
capitalized – they expect that their 2014 capital plan will meet the CCAR
and DFAST requirements and are well-positioned to transition to the
new U.S. Basel III capital requirements by January 2015.
(1) Tier 1 Common Ratio is defined as the ratio of Tier 1 Common Capital to total risk-weighted
assets under U.S. Basel I rules, while the Common Equity Tier 1 Ratio is the equivalent ratio
under U.S. Basel III rules.
Caution
This U.S. Regulatory Developments section contains forward-looking statements.
Please see the Caution Regarding Forward-Looking Statements.
MD&A
BMO Financial Group 196th Annual Report 2013 69