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PROGRESS REPORT: Refining risk management for the global market

We believe disciplined risk management is essential to building competitive advantage. The past year has confirmed the value of consistent leadership in the management of risk and we continue to make significant progress in evolving our risk management programs and making the most effective use of our balance sheet in creating value.

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BMO was and remains proactive. For us, risk management has a twofold objective: to provide appropriate and independent risk oversight across the enterprise, and to partner with all of our lines of business in generating sustainable shareholder returns.
See Enterprise-Wide Risk Management (PDF, 829 KB) section of the MD&A

Eighteen months ago, we launched a review of how we measure and manage risk at BMO. This exercise confirmed some significant strengths, particularly in credit risk, where we have outperformed our peers for some years. The review also identified opportunities for improvement, and we embarked on a program of change immediately.

The agenda of our Risk Evolution Initiative is centred on four themes: ownership and accountability, transparency, optimizing risk-return and building partnerships (see table below).

We have made significant progress on all of these, including the appointment of a new Chief Risk Officer (CRO), reporting to the Chief Executive Officer.

Our Risk Evolution Initiative is focused on managing risk in the current environment and building our capabilities for the future.

In the current environment, this means taking steps to reduce volatility, limiting our activity in some areas and managing credit more actively.

With respect to building our capabilities, we are adding seasoned risk leaders in select areas, enhancing risk education across the enterprise, clarifying accountabilities for managing risk among the business units, risk management and other control functions, focusing on greater risk transparency and more rigorous reporting, and improving the quality and the frequency of the dialogue we have about risk in all of our lines of business.

At the same time, we’ve appointed chief risk officers to support each of the main businesses. This will ensure an integrated view of risk at the business unit level, as well as a solid partnership with business unit leaders in managing the risk they undertake.

In strengthening our risk management practices and culture, we’re making solid progress toward our objective of consistent leadership in the management of risk.

BMO and the global economy

For more than a year, BMO and the other Canadian banks have been involved in a concerted effort to ensure the orderly functioning of financial markets in Canada – and, by extension, helping maintain confidence in global financial markets. This is something we will continue to do. Based upon performance before the current market uncertainty and the initiatives taken during the past year, the World Economic Forum’s most recent Global Competitiveness Report rated Canada as having the soundest banking system in the world.

It is now widely recognized that the global economy and financial markets have been affected by the U.S. mortgage market situation, along with fluctuations in currencies, commodities and equities. Earlier, it was thought that the economies of rapidly growing emerging-market nations, including China, India, Brazil and Russia, might not be notably affected by the weakening U.S. economy. These nations have accounted for much of the growth in demand for commodities – which has in turn been an important driver for Canada’s economy. And indeed, the prices of oil, metals and agricultural products continued to climb through mid-year.

However, as weak economic conditions spread from North America to Japan and much of Europe, export-dependent emerging markets are also experiencing slower rates of growth. This has led to a sharp downward correction in commodity prices. Given continued uncertainty as to when financial markets will recover and stronger global economic performance will return, most markets now face a period of substantial volatility.

At BMO, we are actively managing our businesses to navigate through this environment as it continues to change. This is a time for prudent and consistent management. Our stability, our record of standing behind our customers, the quality of our advice and our financial strength – these are what matter most to our customers right now.

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BMO’s Risk Evolution Initiative is building on our existing strengths. We are systematically investing in our risk management to further enhance our capabilities:

BMO’S RISK EVOLUTION INITIATIVE

1. Building ownership and accountability
  • Lines of business, risk management groups and control functions work closely together, with clearly defined structures and accountabilities
  • Businesses represent the first line of defence in risk management, the Risk Management Group the second line and Internal Audit the third
  • We are instilling a strong sense of ownership and accountability for risk

2. Building risk transparency
  • Bottom-up process ensures we identify, monitor and manage key risks
  • Enhanced top-down view focuses on significant top-line risks and emerging risks
  • Improved risk reporting provides greater transparency and facilitates more effective risk discussions

3. Optimizing risk-return
  • Performance of business units is assessed according to risk-adjusted returns
  • Exiting activities that do not have attractive risk-return profiles to address opportunities that will optimize risk-return

4. Building partnerships
  • Partner with each business to enhance risk transparency and risk-return performance
  • Encourage open and effective dialogue about risk across the enterprise
BMO Financial Group Annual Report 2008 Home