Bank of Montreal 2015 Annual Report Download - page 76

MD&A
Overview
At BMO, we believe that risk management is every employee’s responsibility. We are guided by five core principles that inform our approach to
managing risk across the enterprise.
Our Approach to Risk Management
‰Understand and manage.
‰Protect our reputation.
‰Diversify. Limit tail risk.
‰Maintain strong capital and liquidity.
‰Optimize risk return.
Our integrated and disciplined approach to risk management is fundamental to the success of our operations. All elements of our risk management
framework work together in support of prudent and measured risk-taking, while striking an appropriate balance between risk and return.
Our Enterprise Risk and Portfolio Management (ERPM) group develops our risk appetite, risk policies and limits, and provides independent review
and oversight across the enterprise on risk-related issues to achieve prudent and measured risk-taking that is integrated with our business strategy.
Risks That May Affect Future Results
Top and Emerging Risks That May Affect Future Results
We are exposed to a variety of continually changing risks that have the potential to affect our business and financial condition. An essential mandate
of our risk management process is to proactively identify, assess, monitor and manage a broad spectrum of top and emerging risks. Our top and
emerging risk identification process consists of several forums for discussion with the Board, senior management and business thought leaders,
combining both bottom-up and top-down approaches to considering risk. Our assessment of top and emerging risks is used to develop action plans
and stress tests of our exposure to certain events.
In 2015, particular attention was given to the following top and emerging risks:
Slow Global Economic Growth
Concerns about global growth outside of North America could be triggered by a variety of disparate possible causes, ranging from disruption in
China or other emerging markets to conflicts in the Middle East, North Africa and Europe. These could result in market volatility spikes, lower
commodity prices, currency devaluations, rapid changes in capital flows, regional credit crises and disruption of the social fabric, and higher levels of
uncertainty that reduce growth, employment, trade and business investment. In the short run, market shocks can impact our Capital Markets business,
while over a longer period of time the broader impact could be felt through reduced North American economic growth and weaker credit quality in our
internationally exposed customers.
BMO benefits from an integrated North American strategy in diverse industries, with limited direct lending exposure outside the region and
with a footprint that partially acts as a natural hedge to commodity price and foreign exchange movements, wherein price declines/rises often
have offsetting impacts across different North American regions. We actively monitor sources of global growth and continually assess our portfolio
and business strategies against developments. We stress test our business plans and capital adequacy against severely adverse scenarios arising
outside North America and develop contingency plans and mitigation strategies to react to and offset such possible adverse political and/or
economic developments.
Further information on our direct and indirect European exposures is provided in the Select Geographic Exposures section on page 98.
Information and Cyber Security Risk
Information security is integral to BMO’s business activities, brand and reputation. Given our pervasive use of the internet and reliance on advanced
digital technologies, particularly the mobile and online banking platforms that serve our customers, BMO faces heightened information security risks,
including the threat of hacking, identity theft and corporate espionage, as well as the possibility of denial of service resulting from efforts targeted at
causing system failure and service disruption. BMO proactively invests in defences and procedures to prevent, detect, respond to and manage cyber
security threats. These include regular benchmarking and review of best practices, evaluation of the effectiveness of our key controls and
development of new controls, as needed, and ongoing investments in both technology and human resources to protect BMO, third parties that we
interact with, and our customers against these attacks. BMO also works with critical cyber security and software suppliers to bolster our internal
resources and technology capabilities in order to ensure BMO remains resilient in the face of any such attacks in a rapidly evolving threat landscape.
Protracted Low Oil Prices
The significant decline in oil and gas prices has challenged many companies in the sector and has resulted in wide-ranging actions by affected
companies to increase efficiency, reduce costs, limit capital outflows, sell assets and raise equity. Should oil and gas prices stay at a low level for a
prolonged period of time there will be greater challenges for the industry, with a deterioration of borrower repayment capacity and of borrower
ratings. The oil industry’s response to low prices has indirect negative impacts on commercial businesses and consumers in the oil-producing regions,
particularly in Alberta.
Low oil prices have resulted in quite different outcomes for other sectors and regions within the BMO footprint as lower oil prices have led to a
lower Canadian dollar and lower input costs for many consumers and businesses. Benefits of the lower oil price have shown through in the upturn of
Canadian manufacturing output and non-oil exports and we expect those positive trends to strengthen into 2016. Overall, lower oil prices are a net
positive for global and U.S. demand, and for Canadian non-energy exports.
BMO Financial Group 198th Annual Report 2015 87