Bank of Montreal 2004 Annual Report Download - page 63

BMO Financial Group Annual Report 2004 59
MD&A
Integrated Risk Management
The management of risk is integrated with our management of
capital and strategy. This ensures that risks incurred in pursuit
of BMO’s strategic objectives are consistent with desired total
shareholder return as well as BMO’s desired credit rating and
risk levels, or risk appetite.
Two frameworks support the management of risk: change
management and integrated risk management. They are
designed to:
•ensure that changes to the organization’s risk profile
associated with new business initiatives are correctly
identified and receive appropriate approvals before
implementation; and
•assess the relative magnitude of risks taken and the distri-
bution of those risks across the organization’s activities.
Integrated risk management activities are supported by the
use of capital at risk (CaR) measures, scenario analysis and
stress testing.
CaR provides a single measure of risk that can be compared
across business activities and risk types. It is the foundation
for risk-based capital management and permits the cost of
capital to be charged to the lines of business. CaR indicates, in
terms of capital, the likely magnitude of losses that could occur
if adverse situations arise, and allows returns to be adjusted
for risks. For each risk type noted in the chart below, CaR
measures are based on a confidence level of 99.95% and a
time horizon of one year.
As noted in the chart below, BMO’s largest exposure is
credit risk.
Effective Processes and Models
Rigorous processes, periodically reviewed by Corporate Audit,
are used across BMO to:
•develop policies and limits for approval by senior
governance committees;
•monitor policy compliance;
•maintain contingency plans;
•track variables for changing risk conditions; and
•provide timely reports to senior management and the
appropriate governance committees.
Models used range from the very simple to those that value
complex transactions or involve sophisticated portfolio and
capital management methodologies. These models are used
to guide strategic decisions and to assist in making daily
lending, trading, underwriting, funding, investment and opera-
tional decisions. Models have also been developed to measure
exposure to risk and to measure total risk on an integrated
basis, using capital at risk (CaR). We have strong controls over
the development, implementation and application of these
models, which are subject to a periodic independent model
risk vetting process.
BMO also utilizes various processes and models within
risk types to:
•assess the correlation of credit risks before authorizing
new exposures;
•measure and value portfolio exposures and calculate related
market risk exposure;
•measure the business and operational risk for each line
of business; and
•estimate liquidity and funding risk based on expected
and stressed operating conditions.
Qualified Risk Professionals
Sound enterprise-wide risk management relies upon the
competence and experience of our risk professionals to:
•promote a culture that places high value on disciplined and
effective risk management processes and controls;
•ensure adherence to established risk management standards
for the evaluation and acceptance of risk; and
•apply sound business judgment, using effective business
models in our decision-making.
We offer a risk curriculum program, now in its second year,
developed and delivered in partnership with York University’s
Schulich School of Business. This graduate certificate program
enhances our existing risk management capabilities and
promotes the development of our risk professionals.
Additionally, risk managers and lenders may be required
to complete a progressive curriculum of credit risk courses
offered by BMO’s Institute for Learning in order to be consid-
ered appropriately qualified for their positions. These courses,
together with defined job exposures, provide training and
practice in sound credit risk management as a prerequisite to
the granting of appropriate discretionary lending authority
to qualified professionals.
Desired total
shareholder return
Desired credit rating,
given target business mix
BMO’s Risk Appetite
Approved by the Board of Directors for each major
category of risk and delegated to management in the
lines of business through the CEO
Total Capital at Risk
by Risk Type
As at October 31, 2004
Business 16%
Operational
22%
Credit 38%
Market 24%
Total Capital at Risk
by Operating Group
As at October 31, 2004
IBG 49%
P&C 39%
PCG 8%
Corp 4%
Credit risk is the largest contributor
to CaR.
CaR by operating group was
relatively unchanged in 2004, with
Investment Banking Group having
the largest CaR.