Bank of Montreal 2013 Annual Report Download - page 70

Our risk culture is built around a risk management system that
encourages openness and builds confidence in how we engage stake-
holders in key decisions and strategy discussions, thereby bringing
rigour and discipline to decision-making. This not only leads to the
timely identification, escalation and resolution of issues, but also
encourages communication and understanding of the key risks faced by
our organization, so that our employees are equipped to take action and
make decisions in a coordinated and consistent manner. Also, our
governance and leadership forums, committee structures and learning
curriculums reinforce and inspire our risk culture.
Certain elements of our risk culture that are embedded across our
organization include:
‰ Risk appetite – promotes an understanding of the most prevalent
risks that our businesses face and facilitates alignment of business
strategies within the limits of our risk appetite, leading to sound
business decision-making.
‰ Communication and escalation channels – encourages information
sharing and engagement between ERPM and the operating groups,
leading to enhanced risk transparency and open and effective
communication. We also foster and encourage a culture where con-
cerns regarding potential or emerging risks are escalated to senior
management so that they can be evaluated and appropriately
addressed.
‰ Compensation philosophy – pay is aligned with prudent risk-taking
to ensure that compensation does not encourage excessive risk-taking
and rewards the appropriate use of capital.
‰ Training and education – programs are designed to foster a deep
understanding of BMO’s capital and risk management frameworks
across the enterprise, providing employees and management with the
tools and awareness required to fulfill their responsibilities for
independent oversight regardless of their position in the organization.
Our education strategy has been developed in partnership with BMO’s
Institute for Learning, our risk management professionals, external
risk experts and teaching professionals.
‰ Rotation programs – two-way rotation system allows employees to
transfer between ERPM and the operating groups, thereby effectively
embedding our strong risk culture across the enterprise.
Risk Principles
Risk-taking and risk management activities across the enterprise are
guided by the following principles:
‰ ERPM provides independent oversight of risk-taking activities across
the organization;
‰ management of risk is a responsibility at all levels of the organization,
employing the three-lines-of-defence approach;
‰ ERPM monitors our risk management framework to ensure that our
risk profile is maintained within our established risk appetite and
supported with adequate capital;
‰ all material risks to which the enterprise is exposed are identified,
measured, managed, monitored and reported;
‰ decision-making is based on a clear understanding of risk, accom-
panied by robust metrics and analysis; and
‰ Economic Capital is used to measure and aggregate risk across all risk
types and business activities to facilitate the incorporation of risk into
the measurement of business returns.
Risk Appetite
Our Risk Appetite Framework consists of our Risk Appetite Statement, as
well as supporting key risk metrics and corporate policies and standards,
including limits. Our risk appetite defines the amount of risk that BMO is
willing to assume in all risk types, given our guiding principles and capital
capacity, thereby supporting sound business initiatives and growth. Our
risk appetite is integrated into our strategic and capital planning
processes and our lines of business. On an annual basis, senior manage-
ment recommends our Risk Appetite Statement and key risk metrics for
approval by the RMC and the RRC. Our Risk Appetite Statement is articu-
lated and applied consistently across the enterprise. Among other things,
our risk appetite requires:
‰ that everything we do is guided by principles of honesty, integrity and
respect, as well as high ethical standards;
‰ only taking risks that are transparent, understood, measured, moni-
tored and managed;
‰ maintaining strong capital and liquidity and funding positions that
meet or exceed regulatory requirements and the expectations of the
market;
‰ subjecting new products and initiatives to a rigorous review and
approval process to ensure all key risks and returns are understood
and can be managed with appropriate controls;
‰ maintaining a robust recovery and resolution framework that enables
an effective and efficient response in an extreme crisis;
‰ targeting an investment grade credit rating at a level that allows
competitive access to funding;
‰ limiting exposure to low-frequency, high-severity events that could
jeopardize BMO’s credit ratings, capital position or reputation;
‰ incorporating risk measures into our performance management
system;
‰ maintaining effective policies, procedures, guidelines, compliance
standards and controls, training and management that guide the
business practices and risk-taking activities of all employees to protect
BMO’s reputation and adhere to all regulatory and legal obligations;
and
‰ protecting the assets of BMO and BMO’s clients by maintaining a
system of strong operational risk controls.
Risk Review and Approval
Risk review and approval processes are established based on the nature,
size and complexity of the risks involved. Generally, this involves a
formal review and approval of various categories by either an individual
or a committee, independent of the originator. Delegated authorities
and approvals by category are outlined below.
Portfolio transactions – Transactions are approved through risk
assessment processes for all types of transactions, which include
operating group recommendations and ERPM approval of credit risk and
transactional and position limits for market risk.
Structured transactions – New structured products and transactions
with significant reputation, legal, accounting, regulatory or tax risk are
reviewed by the Reputation Risk Management Committee or the Trading
Products Risk Committee, as appropriate.
Investment initiatives – Documentation of risk assessments is for-
malized through our investment spending approval process, which is
reviewed and approved by Corporate Support areas.
New products and services – Policies and procedures for the approval of
new or modified products and services offered to our customers are
reviewed and approved by Corporate Support areas, as well as other
senior management committees, including the Operational Risk
Committee and Reputation Risk Management Committee, as appropriate.
Risk Monitoring
Enterprise-level risk transparency and monitoring and the associated
reporting are critical components of our framework and operating cul-
ture that help senior management, committees and the Board of Direc-
tors to effectively exercise their business management, risk
management and oversight responsibilities. Internal reporting includes a
synthesis of key risks and associated metrics that the organization
currently faces. This reporting highlights our most significant risks,
BMO Financial Group 196th Annual Report 2013 81
MD&A