Bank of Montreal 2013 Annual Report Download - page 81

MD&A
MANAGEMENT’S DISCUSSION AND ANALYSIS
Liquidity and Funding Risk
Liquidity and funding risk is the potential for loss if BMO is unable
to meet financial commitments in a timely manner at reasonable
prices as they fall due. Financial commitments include liabilities to
depositors and suppliers, and lending, investment and pledging
commitments.
Management Framework Overview
Managing liquidity and funding risk is essential to maintaining the safety
and soundness of the organization, depositor confidence and stability in
earnings. It is BMO’s policy to ensure that sufficient liquid assets and
funding capacity are available to meet financial commitments, even in
times of stress.
BMO’s Liquidity and Funding Risk Management Framework is
defined and managed under Board-approved corporate policies and
management-approved standards. These policies and standards outline
key management principles, liquidity and funding management metrics
and related limits and guidelines, as well as roles and responsibilities for
the management of liquidity and funding risk across the enterprise. BMO
has robust limits and guidelines in place to manage liquidity and funding
risk. These limits and guidelines establish the secured and unsecured
funding appetite for both trading and structural activities, maturity
concentration tolerances, counterparty liability diversification require-
ments and pledging activity. Guidelines are also established for the size
and type of uncommitted and committed credit and liquidity facilities
that may be outstanding to ensure liquidity and funding risk is appropri-
ately managed. An enterprise-wide contingency plan that will facilitate
effective management through a disruption is also in place. Early
warning indicators identified in the contingency plan are regularly
monitored to identify early signs of liquidity risk in the market or
specific to BMO.
The RRC oversees liquidity and funding risk and annually approves
applicable policies, limits and the contingency plan, and regularly
reviews liquidity and funding positions. The RMC and Balance Sheet and
Capital Management Committee provide senior management oversight
and also review and discuss significant liquidity and funding policies,
issues and action items that arise in the execution of our strategy. The
Corporate Treasury group recommends the framework, risk appetite,
limits and guidelines, monitors compliance with policy requirements and
assesses the impact of market events on liquidity requirements on an
ongoing basis.
BMO subsidiaries include regulated and foreign legal entities and
branches, and therefore movements of funds between companies in the
corporate group are subject to the liquidity, funding and capital
adequacy considerations of the subsidiaries, as well as tax and regu-
latory considerations. As such, liquidity and funding positions are
managed on both a consolidated and key legal entity basis. Liquidity
and funding risk management policies and limits are in place for key
legal entities that are informed by legal and regulatory requirements for
each entity, and positions are regularly reviewed at the legal entity level
to ensure compliance with applicable requirements.
BMO employs fund transfer pricing and liquidity transfer pricing
practices to ensure the appropriate economic signals are provided to the
lines of business on the pricing of products for customers and to assess
the performance of each business. These practices capture both the cost
of funding assets and the value of deposits under normal operating
conditions, as well as the cost of supplemental liquid assets held to
support contingent liquidity requirements.
Funding Strategy
Our funding philosophy requires that secured and unsecured wholesale
funding used to support loans and less liquid assets is longer term
(typically maturing in two to ten years) to better match the term to
maturity of these assets. Wholesale secured and unsecured funding for
liquid trading assets is generally shorter term (maturing in one year or
less) and is aligned with the liquidity of the assets being funded, subject
to haircuts in order to reflect the potential for lower market values and
liquidity during times of market stress, and subject to limits on
aggregate maturities permitted across different time periods. Supple-
mental liquidity pools are funded with a mix of wholesale term funding.
BMO maintains a large and stable base of customer deposits that,
along with our strong capital base, is a source of strength. It supports
the maintenance of a sound liquidity position and reduces our reliance
on wholesale funding. Customer deposits include core deposits and
larger retail and commercial fixed-rate customer deposits. Customer
deposits totalled $220.3 billion at the end of the year, up from
$203.5 billion in 2012. BMO also receives deposits to facilitate certain
trading activities, receives non-marketable deposits from corporate and
institutional customers and issues structured notes primarily to retail
investors. These deposits totalled $43.3 billion as at October 31, 2013.
2011 201220102009
Customer Deposits-and-
Capital-to-Total-Loans
Ratio
(%)
Customer Deposits ($ billions)
Core deposits
Larger fixed-dated deposits*
Our large customer base and
strong capital position reduce our
reliance on wholesale funding.
Customer deposits provide a
strong funding base.
2009 2013201220112010
2013
*Excluding wholesale customer deposits.
22.5 17.5
17.1 12.8
125.3 135.3
177.3
190.7
96.5 94.6 91.9
106.6 104.1
2010 and prior based on CGAAP.
15.4
204.9
Total wholesale funding outstanding, consisting of negotiable
marketable securities, was $128.4 billion at October 31, 2013, with
$32.7 billion sourced as secured funding and $95.7 billion sourced as
unsecured funding. The mix and maturities of BMO’s wholesale term
funding are outlined in the table below. Additional information on
deposit maturities can be found in Note 30 on page 185.
BMO maintains a sizeable portfolio of unencumbered liquid assets
of $160.6 billion as of October 31, 2013, that can be monetized to
meet potential funding requirements, as described in the Liquid Assets
section below.
Diversification of our wholesale funding sources is an important part
of our overall liquidity management strategy. BMO’s wholesale funding
activities are well diversified by jurisdiction, currency, investor segment,
instrument and maturity profile. BMO maintains ready access to long-
term wholesale funding through various borrowing programs, including
Material in blue-tinted font above is an integral part of the 2013 annual consolidated financial statements (see page 77).
92 BMO Financial Group 196th Annual Report 2013