ENTERPRISE - WIDE RISK MA NAGEMENT Comprehensive Risk Governance Qualified Risk Professionals Integrated Risk Management Effective Processes and Models BMO FINANCIAL GROUP ANNUAL REPORT 2002 27 BMO Financial Group has developed an enterprise-wide ability to recognize, understand, measure, assess and manage the risks taken across the organization. Our enterprise-wide and risk-wide framework guides our  risk-taking activities and ensures that they are aligned with our clients’ needs and our shareholders’ expectations. This frame- work is applied across all of our risk management activities. It includes the management of risks on an integrated basis as well as direct management of credit, market, liquidity and funding, and operational risks. The framework is built on the following  elements: comprehensive risk governance, effective processes and models and qualified risk professionals. framework. Processes are periodically reviewed by Corporate Audit. The specific risk sections that follow outline risk manage- ment processes in more detail. The models used at BMO range from the very simple to those that value complex transactions or involve sophisticated portfolio and capital management methodologies. These models are used to guide strategic decisions and to assist in making daily lending, trading, underwriting, investment and operational decisions. Effective models have also been developed for the measure- ment of risk. BMO employs these models to measure exposure to risk (credit, market, liquidity and funding, and operational) and we measure the total risk on an integrated basis using the Capital at Risk measure. The Risk Management Group independently validates the models used by the lines of business, their underlying assumptions and their effectiveness in daily practice. Models are reviewed according to a schedule that considers their complexity and potential financial impact.  Sound Enterprise-Wide Risk Management relies upon the com- petence and experience of our risk professionals to: The risk governance structure is designed to ensure BMO has  a strong and well-informed risk culture geared toward making sound business decisions that balance risk and reward and drive the maximization of total return to shareholders. Risk governance involves ensuring that revenue-generating activities are consis- tent with our risk appetite and standards.  Our governance structure for risk-taking is based on the  following: The management of risk is integrated with our management of capital and strategy. This ensures that risks incurred in pursuit of BMO’s strategic objectives are consistent with shareholders’ desired total returns, BMO’s desired credit rating and desired risk levels, or risk appetite. Rigorous processes are used throughout BMO to ensure the consistent and effective management of risk through a control Two frameworks govern the integrated management of risk: b The change management framework outlines processes to ensure that changes to the organization’s risk profile associated with new business initiatives are correctly identified, are con- sistent with BMO’s strategic objective and receive appropriate approvals before implementation; and b The capital management framework ensures that risks arising from business activities are captured in the economic capital process (Capital at Risk) and are consistent with BMO’s strategic objective. b Risk management policies, standards and procedures are con - tinually reviewed to ensure that they provide adequate and effective governance and oversight of our risk-taking activities. b Risk management units dedicated to each of BMO’s operat- ing groups ensure that risk governance is applied effectively through all levels of the organization. b The Head of Risk Management Group provides the Board with comprehensive risk reporting and regular assessments of the organization’s risks. – the Counterparty Risk Council, which deals principally with credit risk issues. – the Risk Management Committee (and its sub-committees dealing specifically with market risk, liquidity and funding risk and operational risk issues); and b The Chief Executive Officer is directly accountable to the Board for all of BMO’s risk-taking activities. The management committee structure, which supports the CEO, includes: b TheRiskReviewCommitteeof theBoardofDirectorsexercises oversight over all risk-taking activities by approving risk man- agement policy, delegating risk-taking authority and limits, reviewing position and limit reporting and reviewing man- agement’s assessment of risk in the major risk-taking activities. b apply sound business judgment, using effective business mod- els in our decision-making. b adhere to established risk management standards for the  evaluation and acceptance of risk; and b promote a strong culture that places high value on disciplined and effective risk management processes and controls; Enterprise-Wide Risk Management Effective processes and models Qualified risk professionals Comprehensive risk governance Desired total  shareholder returns Desired credit rating,  given target business mix Enterprise Risk Appetite Approved by the Board of Directors for each major  category of risk and delegated to management in the  lines of business through the Chief Executive Officer