Introduction

The aim of a risk control framework for a central bank's investment operations is to correctly measure and mitigate – or set an upper bound to – the financial risks arising from the investment activities of the bank and in particular from the holding of domestic and foreign currency investment portfolios. The risk control framework of a central bank is ideally formulated and enforced by an organizationally independent unit that is separated from other business units and in particular from investment managers and bank supervisors. Indeed, if staff involved in portfolio management report on risk and credit exposures, their unbiased measurement is not ensured. Similarly, eligibility and credit limits for investment operations should not be misinterpreted as giving indications of non-public knowledge about a certain counterparty derived from banking supervisory tasks. Chapter 1 dealt extensively with the considerations and specificities of public investors which are key inputs into the definition of a risk management framework for this type of investor. The present chapter deals with how these considerations are mapped into risk management policies and how these policies are made operational in terms of concrete risk management methodologies and infrastructure. The primary components of a sound risk management framework are the following: a comprehensive and independent risk measurement approach; a detailed structure of limits, guidelines and other parameters used to govern risk taking; and strong information systems for controlling, monitoring and reporting risks.