Glossary of Financial Terms
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Allowance for Credit Losses
Allowance for Credit Losses represents an amount deemed adequate by management to absorb credit-related losses on loans and acceptances and other credit instruments. Allowances for credit losses can be specific or general and are recorded on the balance sheet as a deduction from loans and acceptances or, as they relate to credit instruments, as other liabilities.
See Provision for Credit Losses in the 2008 Financial Performance Review (PDF 404 KB) and Credit and Counterparty Risk in the Enterprise-Wide Risk Management (PDF 829 KB) sections of the MD&A. See also Note 4 (PDF 72 KB).
Assets under Administration and under Management
Assets under Administration and under Management refers to assets administered or managed by a financial institution that are beneficially owned by clients and therefore not reported on the balance sheet of the administering or managing financial institution.
Asset-Backed Commercial Paper
Asset-Backed Commercial Paper is a short-term investment with a maturity that is typically less than 180 days. The commercial paper is backed by physical assets such as trade receivables, and is generally used for short-term financing needs.
Assets-to-Capital Multiple
Assets-to-Capital Multiple is defined as assets plus guarantees and letters of credit, net of specified deductions (or adjusted assets), divided by total capital.
Average Earning Assets
Average Earning Assets represents the daily or monthly average balance of deposits with other banks and loans and securities, over a one-year period.
Bankers’ Acceptances (BAs)
Bankers’ Acceptances (BAs) are bills of exchange or negotiable instruments drawn by a borrower for payment at maturity and accepted by a bank. BAs constitute a guarantee of payment by the bank and can be traded in the money market. The bank earns a “stamping fee” for providing this guarantee.
Basis Point
One one-hundredth of a percentage point.
Business Risk Due to Earnings Volatility
Business Risk Due to Earnings Volatility arises from the specific business activities of a company and the effects these could have on the earnings of the company. Business risk due to earnings volatility measures the risk that volumes will decrease or margins will shrink with no opportunity being available to offset the revenue declines with a reduction in costs.
See Business Risk in the Enterprise-Wide Risk Management (PDF 829 KB) section of the MD&A.
Credit and Counterparty Risk
Credit and Counterparty Risk is the potential for loss due to the failure of a borrower, endorser, guarantor or counterparty to repay a loan or honour another predetermined financial obligation.
See Credit and Counterparty Risk in the Enterprise-Wide Risk Management (PDF 829 KB) section of the MD&A. See also Note 6 (PDF 76 KB)
Derivatives
Derivatives are contracts whose value is “derived” from movements in interest or foreign exchange rates, or equity or commodity prices. Derivatives allow for the transfer, modification or reduction of current or expected risks from changes in rates and prices.
Earnings per Share (EPS)
Earnings Per Share (EPS) is calculated by dividing net income, after deduction of preferred dividends, by the average number of common shares outstanding. Diluted EPS, which is our basis for measuring performance, adjusts for possible conversions of financial instruments into common shares if those conversions would reduce EPS.
See Earnings Per Share Growth in the Value Measures (PDF 222 KB) section of the MD&A. See also Note 4 (PDF 72 KB).
Earnings Volatility (EV)
Earnings Volatility (EV) is a measure of the adverse impact of potential changes in market parameters on the projected 12-month after-tax net income of a portfolio of assets, liabilities and off-balance sheet positions, measured at a 99% confidence level over a specified holding period.
See Market Risk in the Enterprise-Wide Risk Management (PDF 829 KB) section of the MD&A.
Economic Capital
Economic Capital is our internal assessment of the risks underlying BMO’s business activities. It represents management’s estimation of the likely magnitude of economic losses that could occur if adverse situations arise, and allows returns to be adjusted for risks. Economic capital is calculated for various types of risk – credit, market (trading and nontrading), operational and business – where measures are based on a time horizon of one year. (For further discussion of these risks, refer to the Enterprise-Wide Risk Management section of the MD&A.) Economic capital is a key element of our risk-based capital management process.
See Enterprise-Wide Capital Management in the Financial Condition Review (PDF 363 KB) section of the MD&A.
Environmental Risk
Environmental Risk is the risk of loss or damage to BMO’s reputation resulting from environmental concerns related to BMO or its customers. Environmental risk is often associated with credit and operational risk.
See Environmental Risk in the Enterprise-Wide Risk Management (PDF 829 KB) section of the MD&A.
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