Bank of Montreal 2007 Annual Report Download - page 75

Liquidity and Funding Risk
Managing liquidity and funding risk is essential to maintaining both
depositor confidence and stability in earnings.
It is BMO’s policy to ensure that sufficient liquid assets and
funding capacity are available to meet financial commitments, even
in times of stress.
Our liquidity and funding risk management framework includes:
•oversight by senior governance committees, including the BSMC,
RMC and RRC;
•an independent oversight group within Corporate Treasury;
•an RRC-approved limit structure to support risk management;
•effective processes and models to monitor and manage risk;
•strong controls over processes and models and their uses;
•a framework of scenario tests for stressed operating conditions; and
•contingency plans to facilitate managing through a disruption.
Data provided in this section reflect BMO’s consolidated position.
BMO subsidiaries include regulated and foreign entities, and therefore
movements of funds between companies in the corporate group are
subject to the liquidity, funding and capital adequacy considerations of
the subsidiaries, as well as tax considerations. Such matters do not
materially affect BMO’s liquidity and funding.
BMO’s liquidity and funding position remains sound and there are
no trends, demands, commitments, events or uncertainties that are
reasonably likely to materially affect the position.
We actively manage liquidity and funding risk globally by holding
liquid assets in excess of an established minimum level at all times.
Liquid assets include unencumbered, high credit-quality assets that are
marketable, can be pledged as security for borrowings, or mature in
a time frame that meets our liquidity and funding requirements. Liquid
assets are held both in our trading businesses and in supplemental
liquidity pools. Liquidity and funding requirements consist of expected
and potential cash outflows. These arise from obligations to repay
deposits that are withdrawn or not renewed, and from the need to fund
asset growth, strategic investments, drawdowns on credit and liquidity
facilities and purchases of collateral for pledging. Liquidity and funding
requirements are assessed under expected and stressed economic,
market, political and enterprise-specific environments, which deter-
mines the minimum amount of liquid assets to be held at all times.
Three of the measures we use to evaluate liquidity and funding
risk are the liquidity ratio, the level of core deposits, and the customer
deposits and capital to loans ratio. The liquidity ratio represents
the sum of cash resources and securities as a percentage of total assets.
This ratio provides an assessment of the extent to which assets can
be readily converted into cash or cash substitutes to meet financial
commitments, as cash resources and securities are more liquid than
loans. BMO’s liquidity ratio at October 31, 2007 was 33.1%, up from
27.2% at October 31, 2006. The increase in the ratio reflects a strong
liquidity position.
Cash and securities totalled $121.2 billion at the end of the year,
up $34.2 billion from $87.0 billion in 2006, while total assets increased
$46.5 billion to $366.5 billion.
Liquidity provided by cash and securities is supplemented by secu-
rities purchased under resale agreements, which also can be readily
converted into cash or cash substitutes to meet financial commitments.
Securities borrowed or purchased under resale agreements totalled
$37.1 billion at the end of the year, up from $31.4 billion in 2006.
In the ordinary course of business, a portion of cash, securities
and securities borrowed or purchased under resale agreements is pledged
as collateral to support trading activities and participation in clearing
and payment systems, in Canada and abroad. At October 31, 2007,
$29.9 billion of cash and securities and $25.5 billion of securities borrowed
or purchased under resale agreements had been pledged, compared
with $25.9 billion and $25.4 billion, respectively, in 2006. These
changes were primarily driven by trading activities. In addition, BMO is
a party to certain agreements that could require incremental collateral
under certain circumstances. These potential incremental collateral
requirements are not material. Additional information on cash and
securities can be found in Table 5 on page 79 and in Notes 2 and 3
on page 97 of the financial statements.
Core deposits are comprised of customer operating and savings
deposits and smaller fixed-date deposits (less than or equal to
$100,000). Canadian dollar core deposits totalled $75.9 billion at the
end of the year, up from $73.3 billion in 2006, and U.S. dollar and other
currency core deposits totalled US$25.1 billion, up from US$22.4 billion
in 2006. In addition, larger fixed-date customer deposits (excluding
wholesale customers) totalled $22.1 billion at the end of the year,
up from $20.3 billion in 2006. Total deposits increased $28.2 billion at
the end of the year to $232.0 billion in 2006. The increase in total
deposits reflects an increase in core and non-core deposits to fund loan
and trading securities growth and to support the continued strengthen-
ing of our liquidity position.
Our large base of customer deposits, along with our strong capital
base reduces our level of wholesale funding. Customer deposits and
capital equals 93.3% of loans (excluding securities borrowed or pur-
chased under resale agreements) at the end of the year, up from 89.9%
in the prior year. Wholesale funding used to support loans is primarily
longer-term (typically two to ten years in maturity term) to better
match the maturity of loans. Our wholesale funding is diversified
through guidelines by customer, type, market, maturity term, currency
and geography. Information on deposit maturities can be found in
Table 24 on page 89.
Our liquidity and funding position could potentially be affected by
off-balance sheet arrangements and other credit instruments through
our obligation to fund drawdowns. These exposures are captured within
our risk management framework.
Liquidity and funding risk is the potential for loss if BMO is
unable to meet financial commitments in a timely manner at
reasonable prices as they fall due. Financial commitments include
liabilities to depositors and suppliers, and lending, investment
and pledging commitments.
The ratio reflects a strong
liquidity position.
Core deposits provide a solid
funding base.
20072006200520042003
29.1 25.8 26.4 27.2
33.1
Liquidity Ratio (%)
20072006200520042003
Core Deposits ($ billions)
20.2
70.3
23.4 22.6 22.4 25.1
Canadian $
US$ and other currency in US$
73.4 72.3 73.3 75.9
MD&A
BMO Financial Group 190th Annual Report 2007 71