Liquidity and Funding Risk
Liquidity and funding risk is managed under an appropriate management framework. There were no material changes in the framework during the quarter.
BMO's liquid assets are primarily held in our trading businesses and in supplemental liquidity pools that are maintained for contingency purposes. Liquid assets include high-quality assets that are marketable, can be pledged as security for borrowings and can be converted to cash in a time frame that meets our liquidity and funding requirements. They do not include potential liquidity that could be realized under borrowing programs with central banks or other market sources. As at January 31, 2013, liquid assets were $227 billion, compared with $211 billion as at October 31, 2012. The increase in liquid assets was primarily attributable to an increase in cash on deposit at central banks and higher reverse repo balances. BMO's cash and securities as a percentage of total assets was 30.6% as at January 31, 2013, compared with 29.4% as at October 31, 2012.
Liquid assets are primarily held at the parent bank level, in our U.S. legal entity BMO Harris Bank, and in BMO's broker/dealer operations in Canada and internationally. In some cases, a portion of those liquid assets have been pledged by certain entities to others in exchange for funding.
In the ordinary course of the bank's day-to-day business activities, a portion of cash, securities and securities borrowed or purchased under resale agreements is pledged as collateral to support trading activities and participation in clearing and payment systems. BMO may also pledge assets to raise secured funding or to secure deposits from select counterparties. Unencumbered liquid assets, defined as total liquid assets less pledged liquid assets, totalled $161 billion compared with $145 billion at October 31, 2012, due to the factors mentioned above. As at January 31, 2013, pledged assets totalled $107 billion, compared with $109 billion at October 31, 2012. Pledged assets decreased slightly in the first quarter primarily due to secured term funding maturities. As at January 31, 2013, pledged assets totalled 19.8% of total assets.
Our funding philosophy requires that secured and unsecured wholesale funding used to support loans and less liquid assets is longer term (typically maturing in two to ten years) to better match the term to maturity for these assets.
Diversification of our wholesale funding sources is an important part of our overall liquidity management strategy. During the first quarter, BMO issued $7.2 billion of wholesale term funding in Canada and internationally. Total wholesale term funding outstanding was $74.6 billion at January 31, 2013, compared with $72.1 billion at October 31, 2012. The increase was used to fund net asset growth and refinance upcoming wholesale term funding maturities. The bank expects to continue accessing the wholesale term funding markets in 2013, primarily to refinance wholesale term funding maturities and net asset growth that may occur over the course of the year. BMO's liquidity and funding management practices and key measures are outlined on pages 86 to 88 of BMO's 2012 annual Report.
----------------------------------------------------------------------------Asset Liquidity Table 12-------------------------------------------------------------------------------------------------------------------------------------------------------- January 31, October 31,(Canadian $ in millions, except as noted) 2013 2012----------------------------------------------------------------------------Liquid Assets, Including Pledged Liquid Assets----------------------------------------------------------------------------Cash and securities Cash and cash equivalents 31,519 19,941 Interest bearing deposits with banks 6,149 6,341Securities Government debt 63,921 66,251 Mortgage-backed securities and collateralized mortgage obligations (1) 7,209 7,961 Corporate debt 22,666 22,271 Corporate equity 34,566 31,841----------------------------------------------------------------------------Total securities 128,362 128,324----------------------------------------------------------------------------Total cash and securities (2) (3) 166,030 154,606----------------------------------------------------------------------------Securities borrowed or purchased under resale agreements 52,957 47,011NHA mortgage-backed securities (reported as loans at amortized cost) (1) 8,484 9,094----------------------------------------------------------------------------Liquid assets (3) 227,471 210,711----------------------------------------------------------------------------Liquid Assets by Legal EntityBMO 143,119 122,623BMO Harris Bank 32,802 30,602Broker dealers 51,550 57,486----------------------------------------------------------------------------Liquid assets 227,471 210,711----------------------------------------------------------------------------Cash and securities-to-total assets (%) 30.6 29.4Pledged Assets (2)---------------------------------------------------------------------------- January 31, October 31,(Canadian $ in millions) 2013 2012----------------------------------------------------------------------------Pledged assets included in total cash and securities 44,866 46,623Pledged assets included in total securities borrowed or purchased under resale agreements 21,378 18,796----------------------------------------------------------------------------Pledged liquid assets (2) 66,244 65,419----------------------------------------------------------------------------Pledged other assets 40,863 43,229----------------------------------------------------------------------------Total pledged assets 107,107 108,648--------------------------------------------------------------------------------------------------------------------------------------------------------(1) Under IFRS, NHA MBS that include BMO originated mortgages as the underlying collateral are classified as loans. Unencumbered NHA MBS securities have liquidity value and are included as liquid assets under the bank's liquidity and funding management framework. This amount is shown as a separate line item called NHA mortgage-backed securities.(2) Included within liquid assets are cash and securities that have been pledged as security for securities borrowed, securities lent, securities sold under repurchase agreements and other secured liabilities. While pledged, these assets are not available to meet our liquidity needs. Liquid assets do not include collateral received from clients that has been re-pledged in the bank's activities.(3) Cash and securities and liquid assets do not include other significant sources of liquidity, including highly rated collateral received from third parties that may be re-hypothecated or potential liquidity that could be realized under borrowing programs with central banks or other market sources. Total cash and securities also includes select holdings management believes are not readily available to support the liquidity requirements of the bank (e.g. minimum required deposits at central banks of $1,045 million, securities held in BMO's insurance subsidiary of $5,893 million, structured investment vehicle of $1,128 million, and credit protection vehicle of $1,343 million; as well as certain investments held in our merchant banking business of $657 million).
