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Capital at Risk (CaR) provides a single measure of risk that can be compared across business activities and risk types. It is the foundation for risk-based capital management and permits the cost of capital to be charged to the lines of business. 

Strategic risk is the risk that volumes will decrease or margins shrink with no opportunity being available to offset the revenue declines with a reduction in costs. 

Management of risks on an integrated basis allows us to assess the relative magnitude of risks taken and the distribution of those risks across the organization’s activities. Integrated risk management activities are supported by the use of Capital at Risk, scenario analysis and stress testing. 

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Capital at Risk (CaR) i s the foundation for risk-based capital management and permits the cost of capital to be charged to the lines of business. CaR indicates, in terms of capital, the magnitude of losses that could occur if adverse situations arise and allows returns to be adjusted for risks. 

Strategic risk is directly managed by the lines of business through business strategies and initiatives based on their contri- bution to shareholder value. Further enhancements to strategic risk measurement are under development. 

Integrated risk management is supported by the ongoing development of enterprise-wide scenario analysis and stress testing. These tools assist in the testing of extreme, but plausible, political, economic, market and operational events in order to ascertain their potential impacts on our operations. 

## Credit Risk 

BMO incurs credit risk primarily in its lending activities. As part of our enterprise-wide risk management framework, we employ comprehensive governance and management processes surrounding credit risk activities. These include: 

b prudent credit granting and credit management through corporate policies governing the philosophy, principles and conduct of credit granting activities; 

b a well-developed limit-setting and monitoring process; 

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## New Basel Capital Accord 

In 1988, the Basel Committee on Banking Supervision introduced the original Basel Capital Accord which, together with the 1998 Basel Capital Accord, forms the basis for determining minimum regulatory capital requirements for banks around the world. The committee is now developing a new accord (referred to as Basel II within the industry), which will: 

b be more risk-sensitive than the original accord; 

b provide a menu of approaches with incentives for better risk management; 

b give greater emphasis to banks’ own internal methodologies; and 

b provide for increased regulatory supervision and more transpar- ent disclosure of a bank’s risk profile and mitigation strategies. 

BMO is supportive of this regulatory development and is working closely with regulators and industry groups to assist in finalizing the quantitative and qualitative aspects of Basel II. This regulatory initiative aligns well with both BMO’s commitment to leadership in risk management and its strategy of continual improvement in risk management and capital management processes. 

To ensure readiness for Basel II, BMO has established an integrated enterprise-wide program with executive sponsorship within the Risk Management Group. Leadership and oversight are provided by an enterprise steering committee comprising senior executives from all stakeholder groups. The program leverages existing enterprise structures for change manage- ment and business process improvement as well as established technology strategies for data warehousing and knowledge management. The program objectives are to: 

b identify the approach for regulatory capital calculation that is most beneficial to shareholders; 

b meet regulatory requirements in a way that is fully integrated with BMO’s risk and capital management framework; and 

b implement the necessary changes with the minimum disrup- tion to BMO’s revenue-generating areas. 

The program is on track and synchronized with the timeline outlined by Basel II and our regulators. 

BMO Financial Group views Basel II as an important step in the alignment of regulatory and economic capital require- ments. Furthermore, it should facilitate the ongoing evolution and adoption of best practices for risk management throughout th e industry. 

Credit risk is the risk of loss due to the failure of a borrower, endorser, guarantor or counterparty to repay a loan or honour another predetermined financial obligation. 

b oversight by senior governance committees, including the Risk Review Committee of the Board of Directors, and the Counterparty Risk Council; and 

b an independent credit risk oversight function within the Risk Management Group. 

