Publisher: Cambridge University Press
Print Publication Year: 2009
Online Publication Date:December 2009
Chapter DOI: http://dx.doi.org/10.1017/CBO9780511575716.014
Risk management as a separate function in a central bank, with resources specifically dedicated to it, is a rather new development in the world of central banking. This may be considered surprising since central banks are, effectively, risk managers for the financial system as a whole. In their core functions of designing and implementing monetary policy and safeguarding financial stability, they manage the risk of inflation and the systemic risks inherent in financial crises. Strangely however, until recently, they had not paid as much attention to the management of their own balance sheet risks that emanate from their market operations. A change is obvious in the last fifteen to twenty years. In part as a consequence of the general acceptance of the principle of central bank independence, central banks have been rethinking their governance structure. After all, financial independence of the central banks is an important element in supporting institutional independence from fiscal authorities and understanding, managing and accurately reporting on financial risks is necessary to control financial results. At the same time central banks as investors are facing increased challenges. Some have accumulated considerable sizes of foreign reserves and need to invest them in a diversified manner. This in turn makes them exposed to more complicated markets and more sophisticated instruments. Finally, risk management expertise is increasingly in demand in order to understand the complexity of risk transfer mechanisms in financial markets and detect potential risks of systemic nature.