Market Risk
Total Trading VaR declined slightly over the quarter due to reduced exposure in equity and interest rate risk factors, coupled with increased diversification. Enhanced risk capture was the main driver behind the moderately higher AFS (Available-For-Sale) VaR. The Credit VaR calculation was amended consistent with our Debt Specific Risk model, which has been submitted for approval for use as a regulatory capital internal model. Total Trading VaR and Stressed VaR figures have been restated for October 31, 2012. For Total Trading VaR, the Credit and Interest Rate VaR figures have been restated with general credit risk reclassified from Interest Rate VaR to Credit VaR. Total AFS VaR has been amended to include specific credit risk. Stressed VaR figures have been restated due to new calibration models implemented in relation to the internal model submission.
There were no significant changes in our structural market risk management practices during the quarter. Structural Market Value Exposure (MVE) is driven by rising interest rates and primarily reflects a lower market value for fixed-rate loans.
Structural Earnings Volatility (EV) is driven by falling interest rates and primarily reflects the risk of prime-based loans repricing at lower rates. MVE decreased from the prior quarter primarily due to lower modelled volatility. EV and earnings exposures under falling interest rate scenarios decreased from the prior quarter largely due to reduced deposit floors. Earnings benefits under rising interest rate scenarios increased from the prior quarter primarily due to wider modelled spreads on deposits and higher asset sensitivity. BMO's market risk management practices and key measures are outlined on pages 82 to 86 of BMO's 2012 Annual Report.
----------------------------------------------------------------------------Total Trading Value at Risk (VaR) Summary ($ in millions)(i) Table 8-------------------------------------------------------------------------------------------------------------------------------------------------------- As at October 31, For the quarter ended January 31, 2013 2012--------------------------------------------------------------- ------------(Pre-tax Canadian Quarter- Quarter- equivalent) end Average High Low end--------------------------------------------------------------- ------------Commodity VaR (0.5) (0.7) (1.0) (0.5) (0.6)Equity VaR (5.2) (6.1) (7.3) (5.2) (6.6)Foreign Exchange VaR (2.8) (2.6) (4.4) (0.1) (0.2)Interest Rate VaR (3.7) (5.3) (10.6) (3.2) (4.5)Credit VaR (5.4) (6.4) (9.4) (4.2) (5.5)Diversification 9.3 10.3 nm nm 6.7------------------------------------------- ------------Total Trading VaR (8.3) (10.8) (15.7) (8.1) (10.7)--------------------------------------------------------------------------------------------------------------------------------------------------------Total AFS VaR (11.8) (11.2) (12.4) (8.5) (8.9)--------------------------------------------------------------------------------------------------------------------------------------------------------(i) Total Trading VaR above is subject to Capital Markets trading management framework.nm - not meaningful----------------------------------------------------------------------------Total Trading Stressed Value at Risk (VaR) Summary ($ inmillions)(i) Table 9-------------------------------------------------------------------------------------------------------------------------------------------------------- As at(Pre-tax Canadian October 31, equivalent) For the quarter ended January 31, 2013 2012--------------------------------------------------------------- ------------ Quarter- Quarter- end Average High Low end--------------------------------------------------------------- ------------Commodity Stressed VaR (1.8) (2.3) (3.1) (1.7) (2.1)Equity Stressed VaR (8.9) (10.1) (12.6) (7.4) (10.5)Foreign Exchange Stressed VaR (4.8) (4.8) (7.0) (0.4) (0.3)Interest Rate Stressed VaR (8.4) (10.7) (15.2) (8.0) (11.4)Credit Stressed VaR (10.5) (11.0) (15.1) (7.7) (9.3)Diversification 21.6 22.4 nm nm 18.9------------------------------------------- -------------Trading Stressed VaR (12.8) (16.5) (21.4) (11.8) (14.7)--------------------------------------------------------------------------------------------------------------------------------------------------------(i) Stressed VaR is produced weekly.nm - not meaningful----------------------------------------------------------------------------Structural Balance Sheet Market Value Exposure (MVE) and Earnings Volatility (EV) ($ in millions)(i) Table 10-------------------------------------------------------------------------------------------------------------------------------------------------------- January 31, October 31,(Canadian equivalent) 2013 2012----------------------------------------------------------------------------Market value exposure (MVE) (pre-tax) (546.6) (590.6)12-month earnings volatility (EV) (after-tax) (68.7) (74.0)--------------------------------------------------------------------------------------------------------------------------------------------------------(i) Losses are in brackets. Measured at a 99% confidence interval.----------------------------------------------------------------------------Structural Balance Sheet Earnings and Value Sensitivity to Changes in Interest Rates ($ in millions)(i) (ii) Table 11-------------------------------------------------------------------------------------------------------------------------------------------------------- Earnings sensitivity Economic value over the next 12 months sensitivity (Pre-tax) (After tax)--------------------------------------------------- ------------------------ January 31, October 31, January 31, October 31,(Canadian equivalent) 2013 2012 2013 2012--------------------------------------------------- ------------------------100 basis point increase (542.4) (537.6) 52.1 20.1100 basis point decrease 401.5 402.9 (55.1) (74.6)200 basis point increase (1,206.5) (1,223.1) 83.1 27.2200 basis point decrease 789.1 783.6 (45.3) (75.1)--------------------------------------------------------------------------------------------------------------------------------------------------------(i) Losses are in brackets and benefits are presented as positive numbers.(ii) For BMO's insurance businesses, a 100 basis point increase in interest rates at January 31, 2013, results in an increase in earnings after tax of $96 million and an increase in before tax economic value of $497 million ($94 million and $560 million, respectively, at October 31, 2012). A 100 basis point decrease in interest rates at January 31, 2013, results in a decrease in earnings after tax of $80 million and a decrease in before tax economic value of $575 million ($74 million and $634 million, respectively, at October 31, 2012). These impacts are not reflected in the table above.
