Bank of Montreal 2008 Annual Report Download - page 78

MANAGEMENT’S DISCUSSION AND ANALYSIS
MD&A
74 | BMO Financial Group 191st Annual Report 2008
credit markets. We believe that a business that effectively manages the
risks it faces, and is disciplined in its approach, will have an advantage
over its competitors in periods of economic uncertainty.
Proceeding from this belief, in 2007 we began a review to ensure
that we do the best job possible of identifying and managing risk.
While this exercise confirmed some significant strengths, it also identified
opportunities for improvement. We have adopted the recommendations
arising from the review, and are implementing them through our
Risk Evolution Initiative. The objectives of this initiative include: creating
a more collaborative and team-based approach to risk management
to ensure risk is assessed and managed on a comprehensive basis,
improving risk reporting, enhancing the operation of our risk committees,
expanding risk education for all executives across the enterprise,
partnering with the Operating Groups to ensure risk transparency and
risk-return optimization, and ensuring clear accountabilities for the
management of risk across the enterprise. The Risk Management Group
and our operating groups are committed to partnering to create
transparency in the assessment of our risks and our risk/return-related
discussions, while still having the Risk Management Group maintain
its independence in risk judgments. Further, we are building risk-related
insights into our strategic plans, and aligning our strategic objectives
with BMO’s risk appetite. In addition, during the year we strengthened
our risk management capabilities by adding a number of senior
executives to the risk management areas through external hires
and transfers from other parts of the organization.
To further the recognition and management of risk within our
businesses, we have recently added Chief Risk Officers to each of our
operating groups. This highlights our commitment to the management
of risk in an integrated fashion at the operating group level, and raises
the stature of risk management across the enterprise.
Our Risk Evolution Initiative seeks to strengthen our risk manage-
ment practices and culture. BMO has a long tradition of strength in
areas of risk management. Our objective is to consistently occupy a
position of leadership in the management of risk.
Effective Processes
Rigorous processes, periodically reviewed by Corporate Audit Division,
are used across BMO to:
•develop policies and limits for approval by senior management and
the appropriate governance committees;
•monitor compliance with policies and limits;
•maintain contingency plans;
•track variables for changing risk conditions; and
•provide timely reports to senior management and the appropriate
governance committees.
Integrated Risk Management
Integrated risk management encourages a strong risk management cul-
ture and ensures alignment with BMO’s enterprise-wide strategic goals.
The management of risk is integrated with our strategic agenda
and our management of capital. This is intended to ensure that risks
incurred in pursuit of BMO’s strategic objectives are consistent with our
targets for total shareholder return and credit ratings, as well as our risk
appetite. The formal implementation of the Internal Capital Adequacy
Assessment Process (ICAAP) during 2008 further integrated the evalua-
tion of our capital adequacy with the associated capital targets and
capital strategies, while also taking into consideration our strategic
direction and risk appetite.
BMO’s risk management group is a key stakeholder in the Initiative
Decisioning Process, which identifies and considers changes to the
enterprise’s risk profile associated with new business initiatives, including
new product initiatives, prior to their approval. Risk management also
utilizes Economic Capital measures, stress testing and scenario analysis
to assess the relative magnitude of risks taken and the distribution
of those risks across the enterprise’s operations.
governance activities, controls and management processes and proce-
dures are consistent with our overall risk management framework.
BMO’s risk principles, risk policies and risk tolerance shape our risk
limits and these limits are reviewed and approved annually by the Risk
Review Committee of the Board for:
•credit and counterparty risk – limits on country, industry,
portfolio/product segments, group and single-name exposures;
•market risk – limits on Market Value Exposure, Earnings Volatility and
stress testing exposures; and
•liquidity and funding risk – limits on minimum levels of liquid assets
and maximum levels of asset pledging, as well as guidelines
approved by senior management for liability diversification and credit
and liquidity commitments.
These risk limits generally encompass both on- and off-balance
sheet arrangements.
Individual governance committees further establish and monitor
comprehensive risk management limits consistent with and subordinate
to the Board-approved limits. Loss limits are also in place, providing an
early warning mechanism to effectively address potential loss situations.
Our operating groups represent the first line of defence in BMO’s
management of risk. Their mandate is to identify suitable business
opportunities and to adopt strategies and practices that will optimize
return on capital or achieve other business objectives. Each operating
group must ensure that it is acting within its delegated risk-taking
authority as set out in our corporate risk policies and limits. Limits are
set for the operating groups, each of which has effective processes and
controls in place to enable them to operate within these limits.
Our second line of defence in the management of risk is provided
by our Risk Management Group and Other Corporate Areas. All of
these groups partner with the operating groups in achieving their
business objectives. It is the responsibility of the Corporate Risk
Management group to recommend and set corporate risk management
policies and establish the infrastructure, processes and practices that
address all significant risks across the enterprise. Corporate Risk Manage-
ment maintains its independent risk judgment and works in partnership
with the lines of business to assess, monitor and report all significant
risks to senior management and, as appropriate, the Board of Directors.
Our third line of defence is the Corporate Audit Group. This group
monitors the efficiency and effectiveness of controls across various
functions within our operations, the reliability of financial reporting, and
compliance with applicable laws and regulations. The Corporate Audit
Group provides timely independent assurance to stakeholders, through
the Board, that BMO Financial Group is adequately and effectively
identifying risk, is implementing appropriate controls and is following
through on risk mitigation plans.
Strengthening Risk Management Capabilities
Sound enterprise-wide risk management relies upon the competence
and experience of our business leaders and risk professionals to:
•promote a culture that places high value on transparent, disciplined
and effective risk management processes and controls;
•monitor adherence to established risk management standards for
the transparent evaluation and acceptance of risk; and
•apply sound business judgment, using effective business models
in decision-making.
To enhance our risk management capabilities, managers and lenders
are offered a progressive curriculum of relevant courses by BMO’s
Institute for Learning. 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 limits
to qualified professionals.
Over the past year, the uncertain and volatile economic climate has
dominated headlines around the world. The global economy and financial
markets have experienced challenges, resulting in a tightening of the