Bank of Montreal 1998 Annual Report Download - page 51

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BANK OF MONTREAL GROUP OF COMPANIES
ENTERPRISE-WIDE RISK MANAGEMENT
THE RISK SPECTRUM
STRATEGY:
To identify, price and manage risk in order to maintain an
appropriate risk-return relationship. Our aim is to use a
comprehensive and integrated risk measurement and
reporting process to ensure that risk is managed consis-
tently and effectively on an enterprise-wide basis.
APPROACH:
■Promote a strong and pro-active culture according high
value to disciplined and effective risk management;
■Communicate clear and concise risk management stan-
dards through policies, directives, operating procedures
and training, with adherence to the policies and proce-
dures verified by an internal, objective audit process;
■Employ professional and dedicated personnel with a
high degree of risk management expertise and experience;
■Adhere to stringent risk management techniques for the
evaluation and acceptance of risk; and
■Utilize leading-edge analytical tools and technologies
to properly capture and price risk, monitor positions
and determine the potential impact of management
initiatives and strategies.
PROCESS OVERVIEW:
■
The Risk Review Committee (RRC) of the Board of
Directors regularly reviews our risk management poli-
cies and practices and management’s assessment of the
major risk areas. Corporate Policies on risk issues are
issued under the authority of the CEO after approval by
the RRC.
■Operating policies, strategies and risk limits in accor-
dance with Corporate Policies are designed to address
existing and emerging risks. These are reviewed by our
Risk Management Group and are then formally presented
to a Committee of senior executives for their review,
with subsequent approval by the President and Chief
Operating Officer. This Committee of senior executives
also oversees risk management processes and receives
regular reports on risk activities.
■
The Risk Management Group assesses our risk expo-
sures, reviews the effectiveness of internal control and
transactional processes in liaison with Corporate Audit,
and coordinates and communicates policy on all risk
management issues.
Our objective is to earn competitive returns from our various business activities, at acceptable risk levels. As a financial steward, we manage
the risks associated with these business activities and the environment in which we operate. This process is termed “risk management.”
Risk is evaluated in terms of impact on income and asset values, and reflects our assessment of the potential impact on our business of changes
in political, economic and market conditions, and the credit-worthiness of our clients. The four primary risks assessed are credit, market,
liquidity, and operational risk. The Risk Spectrum below defines each of these risks.
In the management of these risks we rely on the competence, experience and dedication of our professional staff, sophisticated, quantita-
tively based analytic tools and ongoing investment in technology. This combination of prudence, analytic skills and technology, together with
adherence to our operating procedures, is reflected in the strength and quality of our earnings over time.
LIQUIDITY RISK
Liquidity risk is the risk of being unable
to meet financial commitments, under all
circumstances, without having to raise
funds at unreasonable prices or sell assets
o n a forced basis.
CREDIT RISK
Credit risk is the potential for loss due
to the failure of a counterparty
†
or borrower
to meet its financial obligations. Credit
risk arises from traditional lending activity,
from settling payments between financial
institutions and from providing products
that create replacement risk. Replacement
risk
†
arises when a counterparty’s commit-
ments to us are determined by reference
to the changing values of contractual com -
mitments, for instance, derivatives and
other Treasury products. The same credit
process is used for all forms of credit risk
with the same clients.
MARKET RISK
Market risk is the potential for loss
arising from potential adverse changes
in underlying market factors, including
interest and foreign exchange rates,
equity and commodity prices, spread
and basis risk.
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OPERATIONAL RISK
Operational risk is the potential for loss
(including the adverse impact on our
reputation) as a result of a breakdown
in communications, information or legal/
compliance issues due to systems or
procedural failures, human error, disasters
or criminal activity.
†Defined in the Glossary on page 92