Risk Management for Central Banks
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Tuesday 11 September
ESTABLISHING AN ENTERPRISE WIDE RISK RISK MANAGEMENT CULTURE
Identifying current and future challenges
Led by the chairman Luděk Niedermayer, Director, Deloitte Consulting and Former Vice Governor, Czech National Bank
The global financial crisis has reshaped the risk profile of central banks almost beyond recognition. The new - and in many ways unprecedented - financial risks they face underlines the need for a robust framework for assessing and managing them. This introductory session will set out the fundamental principles of risk management for central banks. Participants will be asked to consider what the essential components of a risk management framework are and discuss the emerging risks facing their institutions.
The integrated risk division: a case-study
Magnus Vesterlund, Head of Risk Division, Sveriges Riksbank
Those in charge of risk management must strive to identify all possible general risks and the potential sources of these for their central bank. But for this to be manageable, the central bank must create a collection point and repository for this information. The speaker will show how his, newly formed and small, integrated risk division, which employs both financial and operational risk experts, is trying to achieve just that. The division covers credit, market and liquidity risks within asset management and monetary policy operations, as well as traditional operational risks within asset management, operational risks in a wider sense within the rest of the central bank, internal control and internal regulation, information security and business continuity. The speaker will share with the group how this "one stop risk shop" was established by blending influences from central banks and other Swedish public institutions as well as the private sector.
Risk management and strategic planning - the interface
For risk managers developing synergies with those in charge of strategic planning and can be highly - and mutually - beneficial. The strategic planning function with its forward looking nature is helpful in sounding out potential future risk areas. By the same token, the risk management function which sits close to the day-to-day business can provide valuable insights for those in charge of the strategic planning process. In this session, the speaker will look at how to best integrate risk management with strategic planning and performance management in order to better manage a central bank's business and reputation risks.
Wednesday 12 September
OPERATIONAL RISK IN FOCUS
The fundamentals of enterprise wide risk management
Jan Nigel Bladen, Chief Operating Officer, Dubai Financial Services Authority
As central banks engage in new operations and prepare to take on new roles, their risk profile necessarily changes. The risk oversight function that the central bank possesses therefore becomes more important and more challenging. The speaker, a highly experienced risk manager, will outline how a risk management function can look across operational, financial and reputational risks, and the techniques used to identify and measure these in the risk function itself and within individual business units and processes. He will show how a central bank's board can formally determine its risk appetite. A series of case-studies will analyse examples of risk management "gone wrong" and group discussion will draw out the lessons to be learned.
Defining operational risk for central banks
Janet Cosier, Adviser on Strategic Planning and Risk Management, Bank of Canada
In today's uncertain world central banks find themselves performing an increasing array of new tasks. These tasks not only strain already busy departments but expose central banks to a wide array of financial and non-financial risks. Several of the latter, notably those related to reputation, have an importance that is difficult to overstate. This session looks at how one central bank has constructed a framework for identifying, managing and mitigating operational risks.
Effective operational risk reporting
Luis Fernandez de Heredia, Head of the Operational Risk Unit, Bank of Spain
A critical aspect for any operational risk manager is reporting to senior management. This is a delicate task for three reasons. First, as it bridges the gap between quantitative analysis and business strategy it is vital that risk managers question assumptions behind the reports. Second, they must find exactly what management knows about operational risk, where their risk tolerance lies and make sure their reports are intelligible to non-risk managers. Third, they must be wary of over-reporting or being seen to "cry wolf". This session will focus on the key elements of an operational risk report, on how reports can be best presented and what can be done to follow up the reporting process.
Business continuity planning: a case study
In 2012 no central bank is unaware of the requirement that all key business areas to be included in effective contingency plans. But these plans must be backed up by efficient management structures to deliver them. What systems are necessary to maintain central bank services in order to preserve confidence in local and international markets? What is the best approach to testing these plans? This session outlines approaches to systems design and procedures for disaster planning for the central bank itself, and, by extension, the financial system in which it sits at the centre of.
Promoting a risk management culture
Discussion led by the chairman
Risk management does not stand still. On an ongoing basis, central banks must identify emerging risks, whether they arise from financial market developments, technological innovation or political uncertainty. Raising risk awareness through the establishment of a risk management culture is a fundamental step to reducing the risks the organisation as a whole faces. In this session, the group will identify and compare practical steps being taken to help foster a risk management culture in their central bank.
Thursday 13 September
FINANCIAL RISK AFTER THE CRISIS
Risk to central bank balance sheets, capital and financial independence
By increasing their exposure to credit and political risk, central banks' balance sheets, funding, reputations and crucially financial independence are - or will be - at risk. The rapid expansion of balance sheets, increased holdings of foreign exchange reserves, revisions to collateral frameworks and contingent liabilities have all heightened the importance of financial risk management. This session examines changes in balance-sheet risks and whether with new mandates central banks are under risk of weakening their capital positions and how to respond to this risk.
The changing environment for FX reserves management
Çiğdem Köse, Chief Representative, London, Central Bank of Turkey (invited)
The experience of the crisis calls for a fundamental reassessment of reserve management. The crisis has highlighted how central banks can face multidimensional requirements when it comes to structuring their reserves whether in terms of currency, asset class or duration. It is clear that central banks may at times face a dilemma over stabilising financial markets and preventing losses in their reserve portfolio: as they sell riskier assets in distressed and less liquid markets they may possibly increase volatility in these markets. Meanwhile, monetary policy and financial stability considerations have led central banks to inject more liquidity and accept lower-rated collateral. This session will consider whether the current features of the typical reserve management framework, such as the most commonly used investment horizons and risk metrics, are fit for purpose or in need of fundamental review. It will also look at the use of an ALM approach for central bank reserve management.
Liquidity risk and open market operations
Speaker to be confirmed
The global financial crisis has required most central banks to introduce unconventional policy measures, such as the expansion in the eligible collateral and asset purchases. Central banks also found themselves injecting foreign exchange liquidity into the system and establishing swap lines. These changes underscore the importance of having a robust risk management framework, yet one that is flexible enough to identify new risks and respond to changing policy needs. In this session, the speaker will discuss new liquidity risks the central bank has faced as a result of the financial crisis and how it has responded.
Credit risk and internal credit rating
Marco Ruiz, Head of Foreign Reserves, Central Bank of Colombia
Central banks' investments are on a continues rise - both in terms of emergency lending as well as foreign exchange reserves accumulation. Central banks have also broadened the list of eligible collateral they accept as part of their various liquidity facilities. With increased exposure to credit and heightened concentration risk, accurate credit assessment is vital. This session will look at how one central bank balances external credit ratings with internal analysis - with limited resources. Group discussion will focus on the lessons to be learned from this approach.
Friday 14 September
REPUTATION: THE MOST VALUABLE ASSET
Risks stemming from central bank interventions
Allan Kearns, Deputy Head of Risk, Central Bank of Ireland
Central banks are being caught between a rock and a hard place - providing emergency lending and liquidity to support financial stability but incurring significant balance sheet risks in the process. In this session, the speaker - whose central bank is critically involved in the on-going resolution of the financial crisis - will show how his central bank manages the associated financial and non-financial organisational risks. He will draw on his central bank's experience of providing substantial liquidity support to the banking system, supporting the recapitalisation and restructuring of the main domestic credit institutions, while his institution went through transformation itself.
Managing reputation risk - central bank communication
Central banks are traditionally seen by the public as conservative institutions. But in times of crisis, the central bank is typically required to take on risk in its policy making capacity. When a central bank has to devote public funds to tackle market disruptions, how it communicates to markets and the public is of critical importance to maintaining its credibility and to the success of the intervention. How policymakers are seen to react to emergencies is, therefore, a vital element of risk management. Central banks need to craft a consistent message regarding their role and policies and the use of public funds, and ensure that this message is effectively communicated. In this session, the speaker will identify what central banks can do to ensure that the risks to their reputation are minimised.
Lessons and action points
Led by the chairman
In this session, the chairman will review the key lessons from the presentations and discussions throughout the course. Delegates will be asked to reflect on how the lessons learnt over the four days can be applied at their home institutions and how emerging risks can best be managed.