Bank of Montreal 2013 Annual Report Download - page 76

Market Risk
Market risk is the potential for adverse changes in the value of
BMO’s assets and liabilities resulting from changes in market varia-
bles such as interest rates, foreign exchange rates, equity and
commodity prices and their implied volatilities, and credit spreads,
as well as the risk of credit migration and default.
BMO incurs market risk in its trading and underwriting activities and
structural banking activities.
As part of our enterprise-wide risk management framework, we
apply extensive governance and management processes to our market
risk-taking activities. These include:
‰ oversight by senior governance committees, including the Balance
Sheet and Capital Management Committee, RMC and RRC;
‰ an Economic Capital process that incorporates market risk measures;
‰ independent valuation of trading positions and measurement of
market risk;
‰ a broad set of policies and corporate standards;
‰ monitoring an extensive range of risk metrics as appropriate for the
respective portfolios, including VaR, Stressed VaR, stress and scenario
tests, risk sensitivities and operational metrics;
‰ a well-developed set of limits with appropriate monitoring, reporting
and escalation of limit breaches; and
‰ a model risk management framework to control for model risk.
BMO’s Market Risk group provides independent oversight of trading and
underwriting portfolios with the goal of ensuring:
‰ market risk of our trading and underwriting activities is measured and
modelled in compliance with corporate policies and standards;
‰ risk profiles of our trading and underwriting activities are maintained
within our risk appetite, and are monitored and reported to traders,
management, senior executives and board committees;
‰ proactive identification and reporting to management, senior execu-
tives and board committees of specific exposures or other factors that
expose BMO to unusual, unexpected, inappropriate or otherwise not
fully identified or quantified risks associated with market or traded
credit exposures; and
‰ all individuals authorized to execute trading and underwriting activ-
ities on behalf of BMO are appropriately informed of BMO’s risk-taking
governance, authority structure and procedures and processes, and
are given access to and guidance on the relevant corporate policies
and standards.
BMO’s Market Risk group also provides oversight of structural market
risk, which is managed by BMO’s Corporate Treasury group and
described on page 91.
Key Trading and underwriting market risk measures include Value
at Risk and Stressed Value at Risk, and key structural market risk meas-
ures include Earnings Sensitivity and Economic Value Sensitivity, as
noted below.
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% con-
fidence level over a specified holding period.
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 calculates the maximum loss likely to be experienced in
the portfolios, measured at a 99% confidence level over a specified
holding period.
Earnings Sensitivity is a measure of the impact of potential
changes in interest rates on the projected 12-month after-tax net
income of a portfolio of assets, liabilities and off-balance sheet
positions in response to prescribed parallel interest rate
movements.
Economic Value Sensitivity is a measure of the impact of potential
changes in interest rates on the market value of a portfolio of
assets, liabilities and off-balance sheet positions, in response to
prescribed parallel interest rate movements.
MD&A
Material in blue-tinted font above is an integral part of the 2013 annual consolidated financial statements (see page 77).
BMO Financial Group 196th Annual Report 2013 87