Operational failure; litigation; deflation; systemic failures - the risks central banks face are multiplying. Though increasingly risk aware, central banks must foster an organisational framework that not only enables new risks to be identified, but also delivers effective risk mitigation and coordinated responses. An attitude of caution is not enough.

How can central banks structure the risk management function to achieve an appropriate risk profile? How can they ensure that they are identifying and prioritising risks appropriately? How can they best manage the risks that impinge on their balance sheets? Should they take into account the implications for the national balance sheet? If so, how?

New Horizons in Central Bank Risk Management tackles these issues head on.

The salience of risk management in central banking skills has been heightened further since publication of the pioneering survey and study, Risk Management for Central Bankers, in 2000, to the extent that some voices are heard claiming that the essence of central banking is risk management.

Comprehensive coverage

This book shows that the application of risk management techniques in a central bank context continues to evolve. Expanding and diversifying markets, demands for accountability and efficiency, as well as broad geo-political developments continually bring new responsibilities and risks to the fore. Central bankers everywhere are conscious that, as overseers of markets, they must ensure sound risk management in their institutions. They must set a high standard. This book reports on how central banks individually are meeting such challenges - and how the profession as a whole is responding. New Horizons in Central Bank Risk Management demonstrates how central bankers are looking to identify and manage the new risks they face, as well as developing innovative means and organisational structures to manage a range of risks from day-to-day aspects to 'one-off' events.

Key topics

New Horizons in Central Bank Risk Management examines current practice and how this has developed in some of the world's leading central banks and therefore provides a benchmark against which central banks can compare their techniques, organisation and performance. All key issues are covered:

• Business continuity for central banks
• Legal risks
• Frameworks for management of foreign exchange reserves
• Operational risk
• Central bank capital and balance sheet strength
• Strategic organisation of the risk management function and unit
• Management of systemic financial risks

State of the art: a new survey

An in-depth survey of over 30 central bank risk managers reveals the diversity and emerging trends in risk management in central banks around the world.

The survey highlights:

• Methods of risk identification, classification and control
• The new risks systematically identified by central banks
• The contribution risk management makes to sovereign creditworthiness of countries
• The techniques central bank risk managers employ to measure risk and their attitude towards value at risk.
• Trends in centralisation and decentralisation of the management of risk and the 'ownership' of risks within the bank
• Approaches to managing operational risk
• An increased focus on capital and balance-sheet strength
• Attitudes towards diversification of reserve assets
• Monitoring of off-balance-sheet risks

Organisational approach

Heightened awareness of new risks facing central banks necessitates a clear understanding of the organisation of the risk management function. How a central bank can coordinate the functions and responses of risk management yet ensure that ownership of the risks is clearly delineated. Who is responsible for monitoring bank-wide risks. How much leeway portfolio managers have. How a central bank can prepare for worst-case scenarios.

Leading authorities

New Horizons in Central Bank Risk Management draws on a wide array of contributors including not only leading practitioners from central banks, but also academia, private sector analysts, the legal profession and the official sector. New Horizons in Central Bank Risk Management builds on five years of Central Banking Publications renowned Cambridge seminars and training courses focused on risk management in central banks. These risk management training courses have been attended by over 100 central bankers from around the world.

Contents

Survey of central bank risk managers
Robert Pringle and Nick Carver, Central Banking Publications

International financial risk management
Alan Greenspan, Board of Governors, Federal Reserve System

Challenges and risks posed to central banks by deflation
Tony Latter, The University of Hong Kong

Investment portfolio techniques at a central bank
Etienne Lavigne, National Bank of Belgium

Implementation of a risk-control framework in the SARB
Callie Hugo, South African Reserve Bank

Central bank risk management and international accounting standards
Jeremy Foster, PricewaterhouseCoopers

Operational risk management for central banks
Junji Hiwatashi and Hiroshi Ashida, Bank of Japan

Legal risk for central banks
Charles Proctor, Tite & Lewis

Planning for business continuity at the Federal Reserve Bank of New York
Maria Massei-Rosato and Elizabeth G. Mindlin, Federal Reserve Bank of New York

The duality of managing foreign exchange reserves
Isabelle Strauss-Kahn, Banque de France

Exchange-rate volatility and reserve management in the Italian experience
Andrea Santorelli, Bank of Italy

Why central banks need financial strength
Peter Stella, International Monetary Fund

Central bank balance sheets and fiscal operations
John Hawkins, Bank for International Settlements

The role of the lender of last resort and risk-management techniques
Anthony M. Santomero and Stephen A. Meyer, Federal Reserve Bank of Philadelphia

A risk-management framework for a central bank
Isabela R. Damaso and Paulo M.F. de Cacella, Central Bank of Brazil

How the Czech National Bank manages its risks
Ludek Niedermayer and Jan Schmidt, Czech National Bank

Concerns and considerations for the practical implementation of the new Basel Accord
Roger W. Ferguson, Jr., Board of Governors, Federal Reserve System

Risk management in the Reserve Bank: a 2003 perspective
Steve Anderson, Reserve Bank of New Zealand

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