Bank of Montreal 2015 Annual Report Download - page 104

MD&A
Heightened regulatory and supervisory scrutiny has had a significant impact on how we conduct business. Working with the operating groups
and other Corporate Support areas, LCG continues to diligently assess and analyze the implications of regulatory changes, and devotes substantial
resources to implementing the systems and processes required to comply with new regulations while also helping the operating groups meet BMO
customers’ needs and demands.
We continue to respond to other global regulatory developments, including capital and liquidity requirements under the Basel Committee on
Banking Supervision (BCBS) global standards (Basel III), over-the-counter (OTC) derivatives reform, consumer protection measures and specific
financial reforms, such as the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). For additional discussion on regulatory
developments relating to capital management and liquidity and funding risk, please refer to the Enterprise-Wide Capital Management section starting
on page 70 and the Liquidity and Funding Risk section starting on page 105.
Cross-Border Resolution and Bail-in – As mentioned on page 71 in the Enterprise-Wide Capital Management section, in August 2014, Canada’s
Department of Finance issued a consultation paper on a Canadian bank resolution framework, including bail-in and Higher Loss Absorbency
requirements. The Enterprise-Wide Capital Management section also discusses the recently released new rules proposed by the Federal Reserve Board
for Total Loss Absorbing Capacity (TLAC) and the Financial Stability Board final standard for TLAC for Global Systemically Important Banks.
Dodd-Frank – Dodd-Frank reforms include heightened consumer protection, revised regulation of the OTC derivatives markets, restrictions on
proprietary trading and the ownership and sponsorship of private investment funds by banks and their affiliates (referred to as the Volcker Rule),
imposition of heightened prudential standards and broader application of leverage and risk-based capital requirements. Dodd-Frank rulemaking will
continue over the next several years. The conformance date for the Volcker Rule, which prohibits banking entities active in the United States and their
affiliates from certain proprietary trading and specified relationships with private investment funds, was July 21, 2015. U.S. regulators previously
extended until July 21, 2016, the time that banking entities have to conform their investments in and relationships with private investment funds in
place before December 31, 2013. They also indicated that during the course of 2015 they would issue a further such conformance extension to
July 21, 2017. BMO completed a significant review of our operations and developed policies and procedures to meet the July 21, 2015 deadline.
We now have systems in place to assess, monitor, and report on Volcker Rule compliance across the enterprise. In addition, under Dodd-Frank, most
OTC derivatives are now subject to a comprehensive regulatory regime. Certain derivatives are now required to be centrally cleared and traded on an
exchange and are subject to reporting and business conduct requirements. In Canada, OTC derivative transactions must now be reported to
designated trade repositories. Capital and margin requirements relating to derivatives are currently being considered by international regulators, and
margin requirements for non-centrally cleared derivatives have been adopted by U.S. regulators. The U.S. Securities and Exchange Commission (SEC)
has adopted rules for security-based swap dealers and other participants in the security-based swap market, including registration requirements. The
date or dates for registration, which depend on additional SEC rulemaking, have not been set. BMO is preparing for the impact of such requirements.
Indirect Auto Lenders – The Consumer Financial Protection Bureau, which enforces certain U.S. federal consumer finance laws, is closely scrutinizing
indirect auto lenders to focus on compliance, including with fair lending laws.
Regulatory Capital Rule Changes – In an effort to increase the comparability of capital requirements and to ensure minimum levels of capital across
the banking system, BCBS is considering a standardized approach for credit, market and operational risk-weighted assets, including new capital floors
based on revised standardized approaches. The current expectation is that the approaches will be settled on during 2016. BCBS is also completing a
fundamental review of the trading book risk-weighted assets and released a consultative paper in June 2015 that discussed the appropriate capital to
be held for interest rate risk in the banking book. Such changes, if implemented, along with the new impairment model based on expected credit
losses under IFRS 9, could have the effect of increasing the capital that we are required to hold.
FBO Rule – In February 2014, the Federal Reserve Board approved a final rule for strengthening supervision and regulation of foreign banking
organizations (FBO Rule) that implements Dodd-Frank’s enhanced prudential standards and early remediation requirements for the U.S. operations of
non-U.S. banks, such as BMO. The FBO Rule establishes new requirements relating to risk-based capital, leverage limits, liquidity standards, risk
management frameworks, concentration and credit exposure limits, resolution planning and credit exposure reporting. On December 29, 2014, we
submitted to the Federal Reserve Board an outline of our implementation plan for meeting these requirements by the effective date (July 1, 2016).
BMO is preparing for the impact of the FBO Rule on its operations.
Federal Budget Proposal – The 2015 Federal budget and the July 31, 2015 technical release proposed tax rules for synthetic equity arrangements
(the 2015 Proposals). Assuming the new Federal government reintroduces the 2015 Proposals, these proposals would, in certain circumstances, deny
any deduction for dividends that are paid or become payable after October 2015, unless the arrangement is grandfathered, in which case the
proposed tax rules would apply to dividends paid or that become payable after April 2017. BMO is currently assessing the impact of this proposal,
which has the potential to increase our effective tax rate.
Risk Governance Framework – In September 2014, the Office of the Comptroller of Currency issued guidelines that establish heightened standards
for large national banks with average total consolidated assets of US$50 billion or more, including BMO Harris Bank N.A. The guidelines set forth
minimum standards for the design and implementation of a bank’s risk governance framework and minimum standards for oversight of that
framework by a bank’s board of directors. The framework must ensure the bank’s risk profile is easily distinguished and separate from the parent for
risk management purposes. A bank’s board of directors is responsible for informed oversight of, and providing credible challenge to, management’s
risk management recommendations and decisions. BMO is required to comply by April 2016, and is implementing a plan to prepare to comply with
this guidance.
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