Today’s rough economic waters have proven that financial institutions need to do a better job of dealing with risk, said the recently appointed chief risk officer at the Bank of Montreal today, before he laid out the bank’s new mandate in the area.
BMO is in the midst of a “risk evolution change effort,” Tom Flynn told an audience at the bank’s investor day in Toronto.
The renewed outlook on risk comes about a month after BMO announced Q1 earnings tumbled 27% and the bank took $548 million in pre-tax writedowns.
In early March, the bank reported earnings of $255 million, or 47¢ a share, for the quarter ending January 31. That compared with net income of $348 million, or 67¢ a share, in the same period a year earlier.
Along with the weak earnings reports came news of a management shake-up that included Flynn’s appointment as executive vice-president and chief risk officer.
The earnings hit was related to positions backed by bond insurer ACA Financial Guarantee Corp. and various asset-backed commercial paper and structured finance-related writedowns, among other charges.
“In light of market changes, it’s now clear that our positions grew beyond what was in line for our risk tolerance and strategic direction,” said BMO president and CEO Bill Downe, at the bank’s annual meeting on March 4. “We’ve taken action and we are making permanent changes to address this,” Downe added.
Flynn’s move from the interim CFO’s chair to leading the bank’s risk management practices was one of these changes.
Today, Flynn told investors that BMO had conducted a comprehensive review of its risk processes as compared with industry best practices and emerging trends.
The company’s new focus will be making sure there is a solid relationship between the businesses and the risk management side of things, specifically on increased transparency and optimizing risk return, he said.
As the economy continues to be choppy, Flynn said BMO will concentrate on lowering volatility in trading and reducing structured credit and securitization activities. The evolution the bank intends to achieve will require a “cultural change,”, he added.
As for the currently troubled asset-backed commercial paper market, Flynn said he is “comfortable with our current ABCP programs” and reiterated the bank’s commitment to the Montreal Accord and the restructuring of the frozen notes.
BMO recently restructured two commercial trusts, Apex and Sitka, in a deal with counterparties and investors for which it put up $850 million in financing. “We remain comfortable with the credit quality of the underlying assets,” said Flynn, of this recent restructuring.
Overall, Flynn said it is an “interesting time” to be in risk management and that the financial services sector will likely be seeing “system level change” as the economic waters begin to calm.