BMO CEO says recent turmoil has put banks through a ‘live stress test’

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Bank of Montreal BMO-T chief executive officer Darryl White says turmoil in the banking sector put the banks through a “live stress test” in recent months, opening the door to tighter scrutiny from regulators amid wavering trust in the industry.

Over the past month, Canada’s banking regulator and the federal government have clamped down on rising risks to the country’s biggest banks as heated interest rates put more pressure on borrowers and two U.S. bank failures cast doubt over stability among lenders. Mr. White said that the increased monitoring is expected and appropriate given the Canadian banking sector’s conservative regulatory requirements, which helped buttress it against fallout from Silicon Valley Bank’s collapse.

“I don’t really see this necessarily as a change in tone or a change in environment, broadly speaking,” Mr. White said. “It’s a focus that’s appropriate given the environment of the time. We’ve been through this, through all sorts of issues over time, and it’s generally been really effective.”

Canadian regulators had already turned a more watchful eye on lenders in the year before the collapse of two U.S. banks sent markets spiralling, but the federal government and the Office of the Superintendent of Financial Institutions have signalled in recent months that they are considering further measures to guard against any potential risks.

On Tuesday morning while BMO’s annual meeting was in session, OSFI unveiled its second annual risk outlook, adding two new challenges to the list. It highlighted liquidity and funding risk as the second-most urgent risk after a real estate market downturn, emphasizing the need for banks to have sufficient deposits and assets that can be converted into cash when unexpected issues arise – one of the factors that led to the failure of Silicon Valley Bank.

Ottawa is also taking precautions. In its budget released in late March, the federal government said that it plans to expand the mandate of OSFI to include determining whether financial companies have sufficient protection against security threats and widening the range of circumstances in which the regulator can take control of a federally regulated financial institution.

Mr. White said that in the past, regulators have increased monitoring of the banking sector in response to fluctuating levels of risk. He said that in recent months, BMO has fielded more calls from clients about the stability of the bank’s balance sheet and the tools it uses to mitigate financial risks, but that “regulation and the supervision in the Canadian banking system has been very effective for a long time.”

“It’s been effectively like a live stress test over the last month,” Mr. White said. “The concerns have been a little bit more acute given some of the volatility that we’ve seen in the U.S. banking sector – which by the way is a lot more stable today than it was a few weeks ago – but it has been all around the element of trust.”

Bank of Montreal is the fourth Big Six lender to hold its annual shareholders meeting, with Bank of Nova Scotia, CIBC and RBC hosting in early April.

Shareholders rejected a proposal for BMO to conduct a “racial equity audit” to have a third party review its employment, compensation and business practices, including how it sells products and services. BMO recommended that shareholders vote against the proposal, saying in its proxy that it is independently tracking progress on its own diversity initiative.

“We measure ourselves against some pretty ambitious outcomes on racial equity,” Mr. White said in an interview. “We want to make sure that any measurement that we introduce, we have confidence that it’s effective. And when and if we get there, we’ll potentially take a different view.”

Even though the proposal failed, 37 per cent voted in favour.

While BMO has its own initiative, “we believe these steps are insufficient to identify, address and prevent the discriminatory impacts that BMO business practices may have on certain demographic groups,” Shareholder Association for Research and Education representative Manna Jacob said during the meeting.

The same proposal was also turned down at RBC’s annual meeting on April 5. Canada’s largest lender had asked shareholders to vote against it, telling them in its proxy that it doesn’t want to do an audit until the banking industry develops standards that apply to all companies. The proposal failed by a slim margin, with 44 per cent voting in favour.

Three other large Canadian banks have already adopted similar shareholder proposals, including Canadian Imperial Bank of Commerce, National Bank of Canada and Toronto-Dominion Bank.

Shareholders also rejected two opposing climate-related motions from separate groups: a proposal to implement a vote for shareholders to indicate their level of satisfaction or dissatisfaction with the bank’s environmental policies, as well as a proposal asking the bank to commit to continuing to invest in the oil and gas sector.