Bank of Montreal 2013 Annual Report Download - page 83

MANAGEMENT’S DISCUSSION AND ANALYSIS
securities borrowed or purchased under resale agreements plus other
off-balance sheet eligible collateral received less collateral encumbered,
totalled $160.6 billion at October 31, 2013. BMO may also pledge other
assets, including mortgages and loans, to raise long-term secured fund-
ing. As part of the Liquidity and Funding Risk Management Framework, a
Pledging of Assets corporate policy is in place that sets out the frame-
work and pledging limits for financial and non-financial assets.
See Table 5 on page 107 for more information on BMO’s liquid
assets, encumbered assets and net unencumbered assets. See Note 28
on page 177 of the financial statements for further information on
pledged assets. BMO’s cash and securities as a percentage of total
assets were 31.2% at October 31, 2013, compared with 29.4% at
October 31, 2012.
Regulatory Developments
In January 2012, the Basel Committee on Banking Supervision (BCBS)
published final guidance on the LCR. The LCR is the ratio of the stock of
high-quality liquid assets to stressed net cash outflows over a 30-day
time period under a specified regulatory scenario. In addition to the LCR,
the final guidance also sets out a suite of liquidity monitoring metrics
(e.g., contractual maturity mismatch, concentration of funding, available
unencumbered assets, LCR by significant currency and market-related
monitoring tools) to aid supervisors in the assessment of the liquidity
risk of an institution. Our expectation is that OSFI will provide guidance
on the domestic implementation of these measures in 2014.
MD&A
The Basel committee also has announced that they are working on
finalizing the Net Stable Funding Ratio (NSFR). The NSFR is the ratio of
the available amount of stable funding (one-year or greater) to the
required amount of stable funding. Additional guidance on the measure
is expected to be provided in 2014. BMO believes it is well positioned to
meet these regulatory requirements.
Credit Ratings
The credit ratings assigned to BMO’s short-term and senior long-term
debt securities by external rating agencies are important in the raising
of both capital and funding to support our business operations.
Maintaining strong credit ratings allows us to access the capital markets
at competitive pricing levels. BMO’s ratings are indicative of high-grade,
high-quality issues. Should our credit ratings experience a material
downgrade, our cost of funds would likely increase significantly and our
access to funding and capital through capital markets could be reduced.
A material downgrade of our ratings could have additional con-
sequences, including those set out in Note 10 on page 147 of the finan-
cial statements.
As at October 31, 2013
Senior long- Subordinated
Rating agency Short-term debt term debt debt Outlook
Moody’s P-1 Aa3 A3 Stable
S&P A-1 A+ BBB+ Stable
Fitch F1+ AA- A+ Stable
DBRS R-1 (high) AA AA (low) Stable
Operational Risk
Operational risk is the potential for loss resulting from inadequate
or failed internal processes or systems, human interactions or
external events, but excludes business risk.
BMO is exposed to potential losses arising from a variety of operational
risks, including process failure, theft and fraud, regulatory non-
compliance, business disruption, information security breaches and
exposure related to outsourcing, as well as damage to physical assets.
Operational risk is inherent in all our business activities, including the
processes and controls used to manage credit risk, market risk and all
other risks we face. While operational risk can never be fully eliminated,
it can be managed to reduce exposure to financial loss, reputational
harm or regulatory sanctions.
The three-lines-of-defence operating model establishes appropriate
accountability for operational risk management. The operating groups
are responsible for the day-to-day management of operational risk in a
manner consistent with our enterprise-wide principles. Independent risk
management oversight is provided by operating group CROs, group
Operational Risk Officers, Corporate Support areas and Enterprise Opera-
tional Risk Management. Operating group CROs and Operational Risk
Officers independently assess group operational risk profiles, identify
material exposures and potential weaknesses in controls, and recom-
mend appropriate mitigation strategies and actions. Corporate Support
areas develop the tools and processes to directly manage specialized
operational risks across the organization. Enterprise Operational Risk
Management establishes the Operational Risk Management Framework
and the necessary governance framework.
Operational Risk Management Framework (ORMF)
The ORMF defines the processes we use to identify, measure, manage,
mitigate, monitor and report key operational risk exposures. A primary
objective of the ORMF is to ensure that our operational risk profile is
consistent with our risk appetite and supported by adequate capital.
Executing our ORMF strategy also requires us to focus on change
management and working to achieve a cultural shift toward greater
awareness and understanding of operational risk through training,
recruitment and retention of the best talent and through communica-
tion. The key programs, methodologies and processes we have devel-
oped to support the framework are highlighted below.
Governance
Operational risk management is governed by a robust committee struc-
ture supported by a comprehensive set of policies, standards and
operating guidelines. The Operational Risk Committee (ORC), a sub-
committee of the RMC, is the main decision-making committee for all
operational risk management matters and has responsibility for the
oversight of operational risk strategy, management and governance.
ORC provides advice and guidance to the lines of business on opera-
tional risk assessments, measurement and mitigation, and related
monitoring of change initiatives. ORC also oversees the development of
policies, standards and operating guidelines that give effect to the
governing principles of the ORMF. These governance documents
incorporate industry best practices and are reviewed on a regular basis
to ensure they are current and consistent with our risk appetite. We
continue to enhance governance by increasing the number of Corporate
Support areas that can provide additional oversight for specific opera-
tional sub-risks.
Risk and Control Assessment (RCA)
RCA is an established process used by our operating groups to identify
the key risks associated with their businesses and the controls required
for risk mitigation. The RCA process provides a forward-looking view of
the impact of the business environment and internal controls on
operating group risk profiles, enabling the proactive management,
mitigation and prevention of risk. On an aggregate basis, RCA results
also provide an enterprise-level view of operational risks relative to risk
appetite, to ensure all key risks are adequately managed and mitigated.
Material in blue-tinted font above is an integral part of the 2013 annual consolidated financial statements (see page 77).
94 BMO Financial Group 196th Annual Report 2013