Bank of Montreal 2000 Annual Report Download - page 44

Approach (continued)
■
Employ dedicated professional 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
segregation of responsibilities; and
■Utilize proven, advanced analytical tools and technologies to properly capture and price risk,
monitor positions and determine the potential impact of management initiatives and strategies.
Governance
■
Authority for all risk-taking activities rests with the Board of Directors and its Risk Review
Committee, which approves risk management policies, delegates limits and reviews manage-
ment’s assessment of risk in the major risk-taking activities;
■The Risk Review Committee’s approval and Board oversight functions are supported within
t he management structure by the Risk Management Committee (and its sub-committees
dealing specifically with market risk, liquidity and operational risk management), by the
Chief Executive Officer’s Counterparty Risk Council and by the Risk Management Group;
■
Risk Management Group reports directly to the Chief Executive Officer and also provides
reports to the Risk Review Committee of the Board of Directors. The group brings together
the functions of policy development, risk measurement and risk review and reporting, using a
range of methodologies (including, where possible, using Capital at Risk (CaR) as the unit of
measurement) to aggregate risks of different types across the enterprise; and
■
While each line of business is accountable for the risks it undertakes, including monitoring
of those risks, the Risk Management Group oversees risk-taking activities enterprise-wide, as
well as adherence to policies and standards.
As depicted above, at the enterprise-wide level we seek to ensure that investors’ return expecta-
tions and rating agencies’ risk assessments, which impact the cost at which we can raise funds,
are appropriately balanced in our choice of strategies. This results in the need to manage the
risk profile against tolerance levels consistent with Board-approved strategies.
The remainder of this section describes how we manage specific risks, including their
measurement, in order to achieve the risk/return balance depicted above. A discussion of our
performance against these measures is also included.
The Aggregation of Risks Across the Enterprise – Capital at Risk
The enterprise continues to build its capabilities towards increased use of the concept of CaR to determine capital
requirements for the enterprise and the lines of business. The various risk components are aggregated to arrive
at the maximum potential loss the enterprise or line of business could incur for a defined level of probability within
a specified time interval.
Using CaR ensures that management recognizes the true capital cost for the risks it takes. This process is
designed to generate the risk component in the performance measurement of risk and return, which contributes
to measurement of economic profit and the increase in shareholder value. Over time CaR will become a key tool
in enabling the Bank to incent for the appropriate risk management behaviour in executing approved strategies,
and to indicate how performance compares to enterprise goals.
Enterprise-Wide Risk Management Framework
20 ■Bank of Montreal Group of Companies Annual Report 2000
Enterprise-Wide Risk Management
Liquidity Risk1
Liquidity risk is the risk of
being unable to meet financial
commitments, under all circum-
stances, without having to raise
funds at unreasonable prices
or sell assets on a forced basis.
Credit/Counterparty Risk1
(“credit risk”)
Credit risk is the potential for loss
due to the failure of a counter-
party1or 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 risk1
.
Replacement risk arises when a
counterparty’s commitments to
us are determined by reference
to the changing values of con-
tractual commitments.
Market Risk1
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,
and spread and basis risk.
Operational Risk1
Operational risk is the risk of loss
resulting from a breakdown
in, for example, communications,
information or transactional
processing or legal/compliance
issues, due to technology/
systems or procedural failures,
human errors, disasters or
criminal activity. The Bank’s
definition of operational risk
consists of two main components,
operations risk and business/
event risks.
þ þ
Shareholders’ expected returns Optimal debt rating, given target business mix
Corporate Standards for Risk Tolerance
Approved by the Board of Directors for each major category of risk,
and delegated to management in the lines of business
1Defined in the glossary on page 88.