Glossary of Financial Terms
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Forwards and Futures
Forwards and Futures are contractual agreements to either buy or sell a specified amount of a currency, commodity, interest-rate-sensitive financial instrument or security at a specific price and date in the future.
Forwards are customized contracts transacted in the over-the-counter market. Futures are transacted in standardized amounts on regulated exchanges and are subject to daily cash margining.
See Note 10 (107 KB)
General Allowance
General Allowance is maintained to absorb impairment in the existing credit portfolio that cannot yet be associated with specific credit assets. It is assessed on a quarterly basis.
We maintain a general allowance in order to cover any impairment in the existing portfolio that cannot yet be associated with specific loans. Our approach to establishing and maintaining the general allowance is based on the guideline issued by our regulator, OSFI. The general allowance is reviewed on a quarterly basis and a number of factors are considered when determining its appropriate level. We employ a general allowance model that applies historical expected and unexpected loss rates, based on probabilities of default and loss given default factors, to current balances.
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).
Hedging
Hedging is a risk management technique used to neutralize or manage interest rate, foreign currency, equity, commodity or credit exposures arising from normal banking activities.
Impaired Loans
Impaired Loans are loans for which there is no longer reasonable assurance of the timely collection of principal or interest.
Innovative Tier 1 Capital
OSFI allows banks to issue instruments that qualify as “Innovative” Tier 1 capital. In order to qualify, these instruments have to be issued indirectly through a special purpose vehicle, be permanent in nature and receive acceptable accounting treatment. Innovative Tier 1 capital cannot comprise more than 20% of net Tier 1 capital, at time of issue, with 15% qualifying as Tier 1 capital and the remaining 5% included in total capital.
Issuer Risk
Issuer Risk arises in BMO‚s trading and underwriting portfolios, and measures the adverse impact of credit spread, credit migration and default risks on the market value of fixed income instruments and similar securities. Issuer risk is 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.
Liquidity and Funding Risk
Liquidity and Funding Risk is the potential for loss if BMO is unable to meet financial commitments in a timely manner at reasonable prices as they fall due. Financial commitments include liabilities to depositors and suppliers, and lending, investment and pledging commitments.
See Liquidity and Funding Risk in the Enterprise-Wide Risk Management (PDF 829 KB) section of the MD&A. See also Note 6 (PDF 76 KB).
Mark-to-Market
Mark-to-Market represents the valuation of securities and derivatives at market rates as of the balance sheet date, where required by accounting rules.
Market Risk
Market Risk is the potential for a negative impact on the balance sheet and/or income statement resulting from adverse changes in the value of financial instruments as a result of changes in certain market variables. These variables include interest rates, foreign exchange rates, equity and commodity prices and their implied volatilities, as well as credit spreads, credit migration and default.
See Market Risk in the Enterprise-Wide Risk Management (PDF 829 KB) section of the MD&A. See also Note 6 (PDF 76 KB).
Market Value Exposure (MVE)
Market Value Exposure (MVE) is a measure of the adverse impact of changes in market parameters on the market value of a portfolio of assets, liabilities and off-balance sheet positions, measured at a 99% confidence level over a specified holding period. The holding period considers current market conditions and the composition of the portfolios to determine how long it would take to neutralize the market risk without adversely affecting market prices. For trading and underwriting activities, MVE is comprised of Value at Risk and Issuer Risk.
See Market Risk in the Enterprise-Wide Risk Management (PDF 829 KB) section of the MD&A.
Net Economic Profit (NEP)
Net Economic Profit (NEP) represents cash net income available to common shareholders, less a charge for capital. NEP is an effective measure of economic value added. NEP is a non-GAAP measure.
See Net Economic Profit Growth in the Value Measures (PDF 222 KB) section and the Non-GAAP Measures (PDF 53 KB) section of the MD&A.
Net Interest Income
Net Interest Income is comprised of earnings on assets, such as loans and securities, including interest and dividend income and BMO’s share of income from investments accounted for using the equity method of accounting, less interest expense paid on liabilities, such as deposits.
See Revenue in the 2008 Financial Performance Review (PDF 404 KB) section of the MD&A.
Net Interest Margin
Net Interest Margin is the ratio of net interest income to earning assets, expressed as a percentage or in basis points. Net interest margin is sometimes computed using total assets.
See Revenue in the 2008 Financial Performance Review (PDF 404 KB) section of the MD&A.
Notional Amount
Notional Amount refers to the principal used to calculate interest and other payments under derivative contracts. The principal amount does not change hands under the terms of a derivative contract, except in the case of cross-currency swaps.
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