Bank of Montreal 2008 Annual Report Download - page 85

MD&A
BMO Financial Group 191st Annual Report 2008 | 81
commitments. Securities borrowed or purchased under resale agree-
ments totalled $28.0 billion at the end of the year, down from
$37.1 billion in 2007.
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, 2008,
$37.7 billion of cash and securities and $33.1 billion of securities bor-
rowed or purchased under resale agreements had been pledged,
compared with $29.9 billion and $25.5 billion, respectively, in 2007.
These changes were driven by trading activities and pledging of assets
related to secured funding programs. Additional information on cash
and securities can be found in Table 5 on page 91 and in Notes 2 and 3
beginning on page 109 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 $85.8 billion at the
end of the year, up from $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,
up from US$25.1 billion in 2007. In addition, larger fixed-date customer
deposits totalled $20.2 billion at the end of the year, compared with
$22.1 billion in 2007. Total deposits increased $25.7 billion during 2008
to $257.7 billion at the end of the year. The increase in total deposits
reflects an increase in core and non-core deposits to fund loan growth
and the appreciation of the U.S. dollar relative to the Canadian dollar.
Our large base of customer deposits, along with our strong
capital base, reduces our requirements for wholesale funding. Customer
deposits and capital equalled 94.2% of loans (excluding securities
borrowed or purchased under resale agreements) at the end of the
year, up from 93.3% in the prior year.
Our funding philosophy requires that wholesale funding used to
support loans is longer term (typically maturing in two to ten years) to
better match the terms to maturity of our loans. Wholesale funding that
supports liquid trading and underwriting assets and available-for-sale
securities is generally shorter term (maturing in under two years).
Diversification of our wholesale funding sources is an important part of
our overall liquidity management strategy. In accordance with internal
guidelines, our wholesale funding is diversified by customer, type,
The ratio reflects a sound
liquidity position.
Core deposits provide a strong
funding base.
20082007200620052004
25.8 26.4 27.2
33.1
29.1
Liquidity Ratio (%)
20082007200620052004
Core Deposits ($ billions)
23.4 22.6 22.4
32.8
Canadian $
US$ and other currency in US$
73.4 72.3 73.3
85.8
25.1
75.9
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.
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 fund-
ing 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 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.
Global wholesale funding markets were affected by reduced confidence
during the year and in particular since mid-September. Money market
funding maturity terms shortened and access to longer-term capital
market funding decreased for all market participants, including banks.
Wholesale funding market spreads are elevated given the heightened
credit concerns. Governments and central banks are taking steps
to restore market confidence and stability. The Government of Canada
has offered a number of programs to provide market liquidity and
the Canadian financial industry, including BMO, has participated
in these programs. We remain satisfied that our liquidity and funding
management framework provides us with a sound position despite
market developments.
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.
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-quality credit 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 withdrawn 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 economic, market, political and enterprise-
specific environments, which determine 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. BMO’s
liquidity ratio was 29.1% at October 31, 2008, down from 33.1% at
October 31, 2007, and averaged 26.5% for the years 2004 to 2006. The
ratio reflects a strong liquidity position.
Cash and securities totalled $121.2 billion at the end of the year,
unchanged from 2007.
Liquidity provided by cash and securities is supplemented by
securities borrowed or purchased under resale agreements, which also
can be readily converted into cash or cash substitutes to meet financial