Bank of Montreal 2004 Annual Report Download - page 132

BMO Financial Group Annual Report 2004128
Allowance for Credit Losses
Represents an amount deemed
adequate by management
to absorb credit-related losses
on loans and acceptances and
other credit instruments.
Allowances for credit losses
can be specific or general
and are recorded on the balance
sheet as a deduction from
loans and acceptances or, as
it relates to credit instruments,
in other liabilities.
Assets under Administration
and under Management
Assets administered or managed
by a financial institution that
are beneficially owned by clients
and therefore not reported on
the balance sheet of the adminis-
tering or managing financial
institution.
Average Earning Assets
Represents the daily or
monthly average balance of
deposits with other banks
and loans and securities, over
a one-year period.
Bankers’ Acceptances (BAs)
Bills of exchange or negotiable
instruments drawn by a bor-
rower for payment at maturity
and accepted by a bank. BAs
constitute a guarantee of
payment by the bank and can
be traded in the money market.
The bank earns a “stamping
fee” for providing this guarantee.
Basis Point
One one-hundredth of a
percentage point.
Derivatives
Contracts whose value is
“derived” from interest
or foreign exchange rates, or
equity or commodity prices.
Derivatives allow for the trans-
fer, modification or reduction
of current or expected risks
from changes in rates and
prices and can also be used
for trading.
Hedging
A risk management technique
used to neutralize or manage
interest rate, foreign currency,
equity, commodity or credit
exposures arising from normal
banking activities.
Impaired Loans
Loans for which there is no
longer reasonable assurance
of the timely collection of
principal or interest.
Innovative Tier 1 Capital
OSFI allows banks to issue
instruments that qualify
as “Innovative” Tier 1 capital.
In order to qualify, these
instruments have to be issued
indirectly through a special-
purpose entity, be permanent
in nature and free of any fixed
charges and accounted for as
non-controlling interests. Inno-
vative Tier 1 capital cannot
comprise more than 15% of net
Tier 1 capital and the sum of
innovative Tier 1 capital and
non-cumulative perpetual
preferred shares cannot exceed
25% of net Tier 1 capital.
Mark-to-Market
Represents valuation at market
rates, as of the balance sheet
date, of securities and derivatives
held for trading purposes.
Notional Amount
The principal used to calculate
interest and other payments
under derivative contracts.
The principal amount does not
change hands under the
terms of a derivative contract,
except in the case of cross-
currency swaps.
Provision for Credit Losses
A charge to income that
represents an amount deemed
adequate by management to
fully provide for impairment
in loans and acceptances
and other credit instruments,
given the composition of
the portfolios, the probability
of default, the economic
environment and the allow-
ance for credit losses
already established.
Regulatory Capital Ratios
The percentage of risk-
weighted assets supported by
capital, as defined by OSFI
under the framework of
risk-based capital standards
developed by the Bank for
International Settlements.
These ratios are labeled Tier 1
and Total. Tier 1 capital is
considered to be more perma-
nent, consisting of common
shares together with any
qualifying non-cumulative
preferred shares, less unamor-
tized goodwill. Tier 2 capital
consists of other preferred
shares, subordinated debentures
and the general allowance,
within prescribed limits.
The assets-to-capital multiple
is defined as assets plus guar-
antees and letters of credit,
net of specified deductions
(or adjusted assets), divided
by total capital.
Securities Purchased
under Resale Agreements
Result from transactions
that involve the purchase of a
security, normally a government
bond, with the commitment
by the buyer to resell the
security to the original seller
at a specified price on a
specified date in the future.
They represent low-cost,
low-risk loans.
Securities Sold under
Repurchase Agreements
Result from transactions
in which a security is sold
with the commitment by
the seller to repurchase the
security at a specified price
on specified date in the
future. They provide low-
cost funding.
Other Definitions Page
Cash Productivity Ratio 32
Earnings per Share (EPS) 24
Expense-to-Revenue Ratio
(or Productivity Ratio) 32
Forwards and Futures 97
General Allowance 91
Net Economic Profit (NEP) 25
Net Interest Income 28
Net Interest Margin 28
Off-Balance Sheet
Arrangements 53
Options 98
Productivity Ratio
(see Expense-to-
Revenue Ratio)
Return on Equity (ROE) 25
Specific Allowances 91
Swaps 97
Taxable Equivalent Basis 28
Tier 1 Capital Ratio
(see Regulatory
Capital Ratios)
Total Capital Ratio
(see Regulatory
Capital Ratios)
Total Shareholder
Return (TSR) 23
Trading-Related Revenues 30
Variable Interest Entities 53
Risk-Related Definitions
Business Risk Due to
Earnings Volatility 66
Capital at Risk (CaR) 59
Credit and
Counterparty Risk 60
Earnings Volatility (EV) 62
Environmental Risk 66
Issuer Risk 62
Liquidity and
Funding Risk 64
Market Risk 62
Market Value
Exposure (MVE) 62
Operational Risk 65
Reputation Risk 66
Social and Ethical Risk 67
Value at Risk (VaR) 62
Glossary of Financial Terms