Bank of Montreal 2014 Annual Report Download - page 55

MD&A
MANAGEMENT’S DISCUSSION AND ANALYSIS
Total Loss Absorbency Capacity (TLAC) comprised of regulatory capital
and eligible liabilities that can absorb losses in resolution. For further
discussion of the Department of Finance and FSB proposals, please refer
to the Liquidity and Funding Risk section starting on page 95.
BMO conducts business through a variety of corporate structures,
including subsidiaries and joint ventures. A framework is in place for
subsidiaries to appropriately manage their funding and capital.
As a bank holding company with total consolidated assets of US$50
billion or more, our subsidiary BMO Financial Corp. (BFC) in fiscal 2014
became subject to the Federal Reserve Board’s (FRB) annual Compre-
hensive Capital Analysis and Review (CCAR) and mid-year Dodd-Frank
Act stress testing (DFAST) requirements. CCAR requires BFC to test its
ability to meet applicable regulatory capital requirements and continue
to operate under severe stress. The quantitative and qualitative aspects
of BFC’s 2014 CCAR capital plan were subject to supervisory review and
the FRB applied its own quantitative tools to evaluate BFC. The FRB
announced its decision not to object to BFC’s capital plan in March 2014
and disclosed the results of its quantitative analysis. BFC and its bank
subsidiary BMO Harris Bank N.A. (BHB) also disclosed their results under
the CCAR supervisory severely adverse scenario. Under DFAST, BFC and
BHB execute mid-year company-run stress tests. BFC and BHB submitted
their DFAST stress tests to the FRB and the Office of the Comptroller of
the Currency in July 2014, and disclosed the results in September 2014.
The Common Equity Tier 1 Ratio reflects Basel III CET1 capital
divided by CET1 capital RWA.
The Tier 1 Capital Ratio reflects Basel III Tier 1 capital divided by
Tier 1 capital RWA.
The Total Capital Ratio reflects Basel III Total capital divided by Total
capital RWA.
The Assets-to-Capital Multiple, a leverage ratio monitored by OSFI,
reflects total assets, including specified off-balance sheet items net
of other specified deductions, divided by Total capital, calculated on
a transitional basis.
The Leverage Ratio is defined as Basel III Tier 1 capital divided by
the sum of on-balance sheet items and specified off-balance sheet
items, net of specified deductions. Banks will be required to publicly
disclose their Basel III Leverage Ratio on a consolidated basis
commencing in the first quarter of 2015.
2014 Regulatory Capital Review
BMO’s capital ratios are strong and exceed OSFI’s requirements for large
Canadian banks, including the 1% D-SIB Common Equity Surcharge to be
implemented in 2016. Our CET1 Ratio was 10.1% at October 31, 2014,
compared to 9.9% at October 31, 2013. The CET1 Ratio increased by
20 basis points from the end of fiscal 2013 primarily due to higher
capital, partially offset by the impact of the F&C acquisition, and a
moderate increase in RWA. The RWA increase was attributable to higher
business volumes, foreign exchange rate movements, which we largely
hedge as discussed below, partly offset by methodology changes,
improved risk assessments and risk mitigation.
Our Tier 1 Capital and Total Capital Ratios were 12.0% and 14.3%,
respectively, at October 31, 2014, compared to 11.4% and 13.7%,
respectively, at October 31, 2013. The Tier 1 and Total Capital Ratios
each increased by 60 basis points from the end of fiscal 2013 due to the
factors impacting the CET1 Ratio, discussed above, as well as the issu-
ances of NVCC-qualifying preferred shares, partially offset by preferred
share redemptions. The increase in the Total Capital Ratio was also
partly due to the issuance of NVCC-qualifying subordinated notes during
the fourth quarter.
BMO’s ACM was 16.1 at October 31, 2014, up from 15.6 at
October 31, 2013, primarily due to balance sheet growth, partly offset
by higher Total capital. Our ACM remains well below the maximum
permitted by OSFI. If the Basel III Leverage Ratio was in force at the end
of the 2014 fiscal year, BMO would have a Leverage Ratio comfortably
in excess of the 3% minimum requirement.
BMO’s investments in foreign operations are primarily denominated
in U.S. dollars. The foreign exchange impact of U.S. dollar-denominated
RWA and U.S. dollar-denominated capital deductions may result in
variability in the bank’s capital ratios. BMO may enter into hedging
arrangements to reduce the impact of foreign exchange movements on
its capital ratios.
66 BMO Financial Group 197th Annual Report 2014