Bank of Montreal 2015 Annual Report Download - page 95

MD&A
MANAGEMENT’S DISCUSSION AND ANALYSIS
asset classes under our management framework are subject to haircuts reflecting management’s view of the liquidity value of those assets in a stress
scenario. Liquid assets in the trading businesses include cash on deposit with central banks and short-term deposits with other financial institutions,
highly-rated debt and equity securities and short-term reverse repurchase agreements. Supplemental liquidity pool assets are predominantly
comprised of cash on deposit with central banks and securities and short-term reverse repurchase agreements of highly-rated Canadian federal and
provincial and U.S. federal government and agency debt. Substantially all supplemental liquidity pool assets meet the definition of liquid assets under
Basel III. Approximately 75% of the supplemental liquidity pool is held at the parent bank level in Canadian- and U.S.-dollar-denominated assets, with
the majority of the remaining supplemental liquidity pool held at BMO Harris Bank in U.S.-dollar-denominated assets. The size of the supplemental
liquidity pool is highly integrated with our measurement of liquidity risk, as its size is calibrated to meet the potential funding needs, outside of our
trading businesses, in the parent bank and BMO Harris Bank and to meet BMO’s target NLP for each entity. To meet local regulatory requirements,
certain of our legal entities maintain their own minimum liquidity positions. There may be legal and regulatory restrictions on our ability to use liquid
assets held in one legal entity to support the liquidity requirements of another legal entity.
In the ordinary course of business, BMO may encumber a portion of cash and securities holdings as collateral in support of trading activities and
our participation in clearing and payment systems in Canada and abroad. In addition, BMO may receive liquid assets as collateral and may re-pledge
these assets in exchange for cash or as collateral for trading activities. Net unencumbered liquid assets, defined as on-balance sheet assets such as
BMO-owned cash and securities and securities borrowed or purchased under resale agreements, plus other off-balance sheet eligible collateral
received, less collateral encumbered, totalled $188.5 billion at October 31, 2015, compared with $171.0 billion at October 31, 2014. The increase in
unencumbered liquid assets was primarily due to the impact of the stronger U.S. dollar. Net unencumbered liquid assets are primarily held at the
parent bank level, at our U.S. legal entity BMO Harris Bank, and in our Canadian and international broker/dealer operations. In addition to liquid
assets, BMO has access to the Bank of Canada’s lending assistance programs, the Federal Reserve Bank discount window in the United States and
European Central Bank standby liquidity facilities. We do not consider central bank facilities to be a source of available liquidity when assessing BMO’s
liquidity position.
In addition to cash and securities holdings, BMO may also pledge other assets, including mortgages and loans, to raise long-term secured
funding. As part of the Liquidity and Funding Risk Management Framework, a Pledging of Assets Corporate Policy is in place that sets out the
framework and pledging limits for financial and non-financial assets.
BMO’s total encumbered assets and unencumbered liquid assets are summarized in the table below. See Note 26 on page 192 of the financial
statements for further information on pledged assets.
Liquid Assets
As at October 31, 2015
As at October 31,
2014
(Canadian $ in millions)
Carrying
value/on-
balance sheet
assets (1)
Other cash and
securities received
Total gross
assets (2)
Encumbered
assets
Net unencumbered
assets (3)
Net unencumbered
assets (3)
Cash and cash equivalents 40,295 – 40,295 2,232 38,063 26,749
Deposits with other banks 7,382 – 7,382 – 7,382 6,110
Securities and securities borrowed or purchased under resale
agreements
Sovereigns / Central banks / Multilateral development
banks 103,793 15,742 119,535 70,962 48,573 41,770
Mortgage-backed securities and collateralized mortgage
obligations 19,371 1,179 20,550 2,194 18,356 16,046
Corporate debt 17,584 6,332 23,916 1,472 22,444 24,026
Corporate equity 58,236 17,897 76,133 40,733 35,400 41,600
Total securities and securities borrowed or purchased under
resale agreements 198,984 41,150 240,134 115,361 124,773 123,442
NHA mortgage-backed securities (reported as loans at
amortized cost) (4) 21,834 – 21,834 3,589 18,245 14,680
Total liquid assets 268,495 41,150 309,645 121,182 188,463 170,981
Other eligible assets at central banks (not included above) (5) 110,703 – 110,703 764 109,939 108,804
Undrawn credit lines granted by central banks –––– ––
Total liquid assets and other sources 379,198 41,150 420,348 121,946 298,402 279,785
(1) The carrying values outlined in this table are consistent with the carrying values in BMO’s balance sheet as at October 31, 2015.
(2) Gross assets include on-balance sheet and off-balance sheet assets.
(3) Net unencumbered liquid assets are defined as on-balance sheet assets, such as BMO-owned cash and securities and securities borrowed or purchased under resale agreements, plus other
off-balance sheet eligible collateral received, less encumbered assets.
(4) Under IFRS, NHA mortgage-backed securities that include mortgages owned by BMO as the underlying collateral are classified as loans. Unencumbered NHA mortgage-backed securities have liquidity
value and are included as liquid assets under BMO’s liquidity and funding management framework. This amount is shown as a separate line item, NHA mortgage-backed securities.
(5) Represents loans currently lodged at central banks that could potentially be used to access central bank funding. Loans available for pledging as collateral do not include other sources of additional
liquidity that may be realized from the loan portfolio, including incremental securitization, covered bond issuances and Federal Home Loan Bank (FHLB) advances.
Material presented in a blue-tinted font above is an integral part of the 2015 annual consolidated financial statements (see page 86).
106 BMO Financial Group 198th Annual Report 2015