Bank of Montreal 2008 Annual Report Download - page 121

Notes
BMO Financial Group 191st Annual Report 2008 | 117
The following table categorizes net loans and acceptances based on
sensitivity to changes in interest rates:
(Canadian $ in millions) 2008 2007
Fixed rate $ 66,257 $ 66,117
Floating rate 137,445 121,530
Non-interest sensitive (1) 11,293 13,541
Total $ 214,995 $ 201,188
(1) Non-interest sensitive loans and acceptances represent customers’ liability under acceptances.
Market Risk
Market risk is the potential for a negative impact on the balance sheet
and/or income statement resulting from adverse changes in the value
of financial instruments as a result of changes in certain market variables.
These variables include interest rates, foreign exchange rates, equity and
commodity prices and their implied volatilities, as well as credit spreads,
credit migration and default. We incur market risk in our trading and
underwriting activities and structural banking activities.
Our market risk management practices and key measures are
outlined in the text and tables identified in a blue-tinted font in the
Risk Management section of Management’s Discussion and Analysis
on pages 77 to 80 of this report.
Liquidity and Funding Risk
Liquidity and funding risk is the potential for loss if we are unable to meet
financial commitments in a timely manner at reasonable prices as they
fall due. It is our policy to ensure that sufficient liquid assets and funding
capacity are available to meet financial commitments, including liabilities
to depositors and suppliers, and lending, investment and pledging com-
mitments, even in times of stress. Managing liquidity and funding risk is
essential to maintaining both depositor confidence and stability in earnings.
Our liquidity and funding risk management framework includes:
•oversight by senior governance committees, including the Balance
Sheet Management Committee, Risk Management Committee and
Risk Review Committee (“RRC”);
•an independent oversight group within Corporate Treasury;
•an RRC-approved limit structure to support the maintenance of
a strong liquidity position;
•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.
We actively manage liquidity and funding risk globally by holding
liquid assets in excess of an established minimum level at all times.
Contractual maturities of non-trading financial liabilities as at October 31, 2008 were as follows:
Less than 1 to 3 4 to 5 Over 5 No fixed
(Canadian $ in millions) 1 year years years years maturity Total
On-Balance Sheet Financial Instruments
Deposits (1) $ 116,297 $ 26,146 $ 8,942 $ 5,767 $ 99,448 $ 256,600
Derivative obligations 345 603 320 294 – 1,562
Subordinated debt 368 693 434 5,408 – 6,903
Capital trust securities 78 868 413 – – 1,359
Preferred share liability 253 – – – – 253
Other financial liabilities 41,167 228 265 3,560 42 45,262
158,508 28,538 10,374 15,029 99,490 311,939
Off-Balance Sheet Obligations
Commitments to extend credit 41,113 21,270 16,953 1,772 – 81,108
Operating leases 211 337 233 629 – 1,410
Purchase obligations (2) 296 589 491 266 – 1,642
41,620 22,196 17,677 2,667 – 84,160
Total $ 200,128 $ 50,734 $ 28,051 $ 17,696 $ 99,490 $ 396,099
(1) Excludes interest payments.
(2) We have entered into five outsourcing contracts. In 2008, we entered into a five-year contract with optional five-year renewals with an external service provider which grants us the right to issue Air Miles
in Canada to our customers. In 2007, we entered into a five-year contract with the option to extend for an additional two-year term with an external service provider that provides facility management
services to our Canadian branches. In 2006, we entered into a six-year contract with an external service provider to provide application system maintenance and development services. In 2003, we entered
into a ten-year contract with an external service provider to provide human resource transactional business processing. In 2000, we entered into a five-year contract with two optional five-year renewals
with an external service provider to manage our cheque and bill payment processing, including associated statement and report printing activities. All outsourcing contracts are cancellable with notice.
The balances for on-balance sheet financial instruments in the table above will not agree with those in our consolidated financial statements as this table incorporates all cash flows, on an undiscounted
basis, including both principal and interest.
Liquid assets include unencumbered, high credit-quality assets that
are marketable, can be pledged as security for borrowings, and could be
converted to cash 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 that are maintained for contingency purposes.
Liquidity and funding requirements consist of expected and potential cash
outflows. These arise from obligations to repay deposits that are with-
drawn or not renewed, and from the need to fund asset growth, strategic
investments, drawdowns on off-balance sheet arrangements and other
credit instruments and purchases of collateral for pledging. Liquidity and
funding requirements are assessed under expected and stressed eco-
nomic, market, political and enterprise-specific environments, which
determines 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. Our liquidity ratio as at
October 31, 2008 was 29.1% (33.1% in 2007).
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 $85.8 billion at the end of the year
($75.9 billion in 2007), and U.S. dollar and other currency core deposits
totalled US$32.8 billion at the end of the year (US$25.1 billion in 2007).
Our large base of customer deposits, along with our strong
capital base, reduces our requirements for wholesale funding. Customer
deposits and capital equalled 94.2% of loans (excluding securities
borrowed or purchased under resale agreements) at the end of the
year (93.3% in 2007).
Our funding philosophy is that wholesale funding used to support
loans is longer-term (typically two to ten years in maturity) to better
match the terms to maturity of loans. Wholesale funding that supports
liquid trading and underwriting assets and available-for-sale securities
is generally shorter-term (maturing in under two years) in nature.
Diversification of our wholesale funding sources is an important part
of our overall liquidity management strategy. In accordance with
internal guidelines, our wholesale funding is diversified by customer,
type, market, maturity term, currency and geographic region.
Contractual Maturities of Financial Liabilities
Financial liabilities are comprised of trading and non-trading liabilities.
As liabilities in trading portfolios are typically held for short periods
of time, they are not included in the table below.