Dear Delegate,

BUSINESS CONTINUITY AND RISK MANAGEMENT IN CENTRAL BANKING

Around the world, central banks face mounting financial risks. The credit crunch has not only elevated ‘traditional’ risks to central banks’ balance sheets, but also added new risks that need to be managed.

The acceptance of riskier forms of collateral and the unprecedented scale of the liquidity support during the crisis present complex new challenges to the assessment and management of financial risks. To be sure, the crisis calls for a reassessment of many ‘standard’ risk management concepts, as credit, liquidity and foreign exchange risks have escalated to levels deemed unimaginable a mere 12 months ago.

At the same time, the risk management paradigm – and the development of a range of practical tools with which to manage financial exposures – has played a large part in preventing more serious damage to central banks’ balance sheets and reputation. This underlines the fact that valuable lessons can be drawn from past experiences.

This practitioner-oriented seminar will help risk managers in central banks identify what works and what does not in managing financial risks. It addresses these questions through in-depth discussions, organised along a number of key themes:

Emerging risks: risk assessment needs to be forward-looking and geared towards estimations of the likely impact of different risk scenarios. The seminar will provide participants with an opportunity to compare risks assessment indicators, and discuss which financial risks are increasing in importance.

Managing risk: once risks have been identified, central banks need to actively manage them. Discussion will focus on which tools have proved most effective in this regard and how to avoid and minimise conflicts of interest between the management of financial risk and the achievement of other policy objectives.

Governance: how should the risk management function be organised? How can robust reporting lines and ownership of the risk management process be established? Discussion will focus on practical examples of the models employed by a number of central banks and the lessons that can be learned from their experiences.

This seminar, which takes place in a relaxed, roundtable format allows participants to learn from the experiences of others and critically engage an elite panel of speakers. The emphasis is on interaction and debate.

We are delighted to welcome Lude?k Niedermayer, a former vice-governor of the Czech National Bank with extensive experience in central bank risk management, as chairman for the seminar.

We look forward to welcoming you to Cambridge on 26 August.

Yours faithfully,

Robert Pringle
Managing Director, Central Banking Publications Ltd

Identifying current and future challenges
Group discussion led by the chairman, Ludek Niedermayer

Identifying risks from market operations
Lisbeth Zacho
Head of Division, Market Operations, Denmarks National Bank,

Central banks must ensure stability and liquidity in domestic money markets. Essential to fulfilling this role is the appropriate choice of policy instruments, assets and the management of credit risk. But, as the recent crisis has shown, when liquidity needs rise sharply, the framework for market operations needs to be flexible. How, from a risk management perspective, can a central bank assess and manage the risks related to market operations and their impact on the balance sheet? What is the role of risk managers in internal discussions on liquidity support? In this session, the chairman will discuss the latest developments in risk management techniques and how these approaches have performed during recent periods of market stress.

Emerging risks: widening collateral frameworks
Mark Zelmer
Director, Financial Risk Office, Bank of Canada

In the wake of the credit crisis, a number of central banks have accepted instruments with higher liquidity and credit risk, such as mortgage-back securities and collateralised debt obligations, in exchange for central bank money. This session will look at the dangers underlying this trend. How have the profound changes in the financial markets in recent years – notably the shift from banks to capital markets as the predominant source of lending and credit – changed the risks involved in central bank’s market operations and collateral frameworks? This session will consider the practical steps central banks can take to identify, assess and mitigate these risks.

Capital adequacy: identifying balance sheet risks
Andrew Hawkins
Partner, PricewaterhouseCooper

Low returns on assets have reduced central banks’ incomes; a return to higher yields may even threaten their solvency. Yet the diverse nature of a central bank’s functions means that there is no definitive answer as to what constitutes capital adequacy. This session will discuss risks to the central bank’s balance sheet: how a central bank’s solvency affects its independence, the central bank’s role in managing risks on the national balance sheet and the question of how much capital a central bank needs and methodologies for calculating this.

Liquidity risks: lessons from the credit crunch
Roger Uhlmann
Head of Investment Strategy Unit, Risk Management Division, Swiss National Bank

One of the most striking features of the credit crunch has been the significant and unexpected tightening of liquidity conditions in a number of assets classes. Interestingly, asset classes that have traditionally been viewed as sensitive to liquidity risk, such as equities and credit derivatives, have remained relatively liquid, while debt instruments become almost untradable. This underscores the limitations of the liquidity frameworks developed during ‘normal’ market conditions. This session will draw on the lessons from the Swiss National Bank’s reassessment of the framework for managing liquidity risk to its reserves portfolio and consider what implications the experience may have for diversification strategies.

Potential conflicts between reserve management and liquidity support
Workshop led by the chairman, Ludek Niedermayer

The credit crisis of 2007-08 has shown that central banks may, in times of market stress, face a trade-off between stabilising financial markets and preventing losses on their reserves portfolio. On the one hand, reserve managers will seek to lower their risk exposure by reducing holdings of asset classes in distressed and less liquid markets, and as a result, cut back on their credit exposures to troubled financial institutions. On the other, monetary policy and financial stability considerations mean that central banks need to provide more liquidity to both distressed markets and institutions. The credit crisis has therefore underlined the potential for conflicts between market stability functions of a central bank and reserve management. This session will address these issues from the perspective of a financial risk manager and discuss how a long-term horizon for reserve and risk management can be operationalised.

Portfolio techniques for managing exchange-rate risk
Roberts Grava
Vice-President, JPMorgan Asset Management and former Member of the Executive Board, Bank of Latvia

For many central banks, gold and foreign exchange exposures represent the largest contributors to risk in a reserves portfolio. Yet, these exposures are not easily hedged, as allocation is determined by monetary policy rather than investment policy considerations. The challenge for reserve managers is that there is only limited leeway to rebalance the portfolio. Central banks’ balance sheets and reserves portfolios must therefore be able to live with big fluctuations in their overall risk exposure. These limitations do not, however, mean that central banks can take a passive stance towards managing risks from currency fluctuations to the portfolio. This session will consider a range of cutting-edge portfolio and risk management techniques, and evaluated their usefulness to central banks looking to manage exchange rate risks proactively.

Promoting a risk management culture in a central bank
Workshop session led by the chairman, Ludek Niedermayer

If risk management is increasingly recognised as lying at the heart of central banking, how should the structure and governance of a modern central bank reflect this? What does this imply for the reform of the organisation of central banks? An essential ingredient in successful risk management strategy is to make each individual – whether they are involved in financial market activity or not – think about the risk faced in their own work. Indeed, raising risk awareness through the establishment of a risk management culture is widely recognised as fundamental step towards reducing the risks the organisation as a whole faces. In this workshop, the group will identify which practical steps can be taken to help foster a risk management culture in a central bank.

Lessons and action points
Led by the chairman, Ludek Niedermayer

In this round-up session, the chairman and the group will draw out the key lessons arising from the previous days’ discussions. Delegates will be asked to reflect on how emerging risks can best be managed and how the lessons learned over the four days of the seminar can be implemented in their home institutions.