Bank of Montreal 2008 Annual Report Download - page 87

MD&A
BMO Financial Group 191st Annual Report 2008 | 83
Strategic Risk
Strategic risk arises from two sources: external risks inherent in
the business environment within which BMO operates, and the risk
of potential loss if BMO is unable to deal with those external risks
effectively. While external strategic risks –including economic, political,
regulatory, technological, social and competitive risks –cannot be
controlled, the likelihood and magnitude of their impact can be mitigated
through an effective strategic management process.
BMO’s Office of Strategic Management (OSM) oversees the
governance and management processes for identifying, monitoring
and mitigating strategic risks across the enterprise. A rigorous strategic
management process is intended to ensure that a consistent approach
is taken towards strategy development and that strategies are based
on accurate and comprehensive financial information and linked to
financial commitments. The OSM works with lines of business and key
corporate stakeholders during the strategy development process to
promote consistency and adherence to strategic management standards.
Included in this process is a review of the changing business
environments within which each of our lines of business operates,
including broad industry trends and the actions of our competitors.
Strategies are reviewed with the Management Committee and the
Board of Directors annually in interactive sessions designed to test
assumptions and ensure that strategies are reflective of current and
potential future environments.
Performance commitments established through the strategic man-
agement process are continuously monitored and reported upon
quarterly, using both leading and lagging indicators of performance, so
that strategies can be reviewed and adjusted when necessary. Regular
strategic and financial updates are also monitored closely to identify
any significant issues.
Strategic risk is the potential for loss due to fluctuations in the
external business environment and/or failure to properly respond
to these fluctuations due to inaction, ineffective strategies or poor
implementation of strategies.
•major business strategy models to forecast the possible outcomes
of new strategies, in support of business decision process; and
•models driven by regulatory and other stakeholder requirements.
Prior to use, models are subject to review under the Model Risk
Corporate Standard by our Model Risk & Vetting group. The Model Risk
Corporate Standard outlines minimum acceptable requirements for the
identification, assessment, monitoring and management of models and
model risk throughout the enterprise. All models are rated according to
their risk levels, which determines the frequency of ongoing review.
Model Risk
BMO uses models that 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 operational decisions. Models have also been
developed to measure exposure to specific risks and to measure total
risk on an integrated basis, using Economic Capital. We have strong
controls over the development, implementation and application of
these models.
BMO uses a variety of models, which can be grouped within
six categories:
•
valuation models for valuation of assets, liabilities or reserves;
•risk exposure models measuring credit risk, market risk, liquidity
risk and operational risk, and also addressing expected loss and
its applications;
•capital and stress testing models for measuring capital, capital
allocations and regulatory and economic capital management;
•fiduciary models for asset allocation, optimization and portfolio
management;
Model risk arises from the possible divergence between
what a model estimates will occur, and what actually occurs.
Model risk also arises from the possibility of the use of an
inappropriate model or the inappropriate use of a model.