How central banks can mitigate operational risk
Originally published on openlink.com in 2018.
Updated August 2023.
While central bank risk management is often associated with mitigating visible forms of risk like market, credit, and liquidity risk on collateralized portfolio assets, the menace of operational risk often remains invisible until it’s too late. Integrating transparency and accountability directly into the ecosystem and technology infrastructure is how central banks can mitigate operational risk, both internally and externally.
The emergence of the silo
Central banks, like corporations, have operational infrastructures that are just as susceptible to the silo effect, especially under the pressure of continuous public, political, and regulatory scrutiny. The silo effect results from structural and process bottlenecks where data is segmented between different platforms servicing different functions. For example, having one platform for engaging pensions while sovereigns may need a different access point through a patched part of the platform.
This segmentation of data can hamper the ability to quickly gain a panoramic perspective of a nation’s liquidity thresholds, and users may have to undergo the cumbersome and time-consuming task of manually piecing together the data from separate sources to derive a conclusion.
Avoiding the Franken-platform
To complicate matters, some portions of legacy systems may have received upgrades while other portions were patched, and still other portions completely replaced with a new platform to handle separate (incompatible) functions. Legacy systems can ultimately mutate into “Franken-platforms,” pieced together with different parts out of necessity to avoid disrupting day-to-day operations. As Franken-platforms age, they can become the source of—not the solution to—problems.
Operational risk fosters external issues
The exposure of internal operational risk can also create external issues of credibility and quickly erode sentiment. Taking the European Central Bank (ECB) as an example, any doubt cast on the capability of an individual nation’s central bank to carry out the ECB’s policies and maintain guidelines can create splinters and fractures within the EU organization. Ensuring this requires that member central banks have their own house in order, equipped with scalable technology infrastructure capable of meeting the expectations of the public, peers, and counterparties around the clock.
The single-source platform solution
An ideal system should have the adaptive flexibility to integrate with existing legacy systems to pull, homogenize, and merge references onto a single source of truth platform. The robust data can then be transformed into powerful and actionable market intelligence that accommodates front-, middle-, and back-office processes. Central bank risk management is taken to a whole new level with such a system.
A single-source platform can manage front-office features including trading execution, risk scenario analytics, cash management and forecasting, and pre-trade analytics for all types of marketable financial instruments ranging from securities, derivatives, forex trading, commodities, fixed-income to spreads, swaps, and precious metals. Middle-office features can include risk management tools, hedge analytics, portfolio calculations, time series analysis, stress testing, and market data management. Back-office features can integrate payment processing, accounting functions, settlements and transfers, scheduling, reconciliation, and collateral management tools.
Real-time analytics including risk scenario analytics, collateral management, instrument correlations, automated hedging models, treasury, compliance, and logistics modules with seamless trade executions on every type of financial asset on a single-source platform enables accountability and transparency.
Sophisticated features woven together for continuous and simultaneous engagement sequences generate a cumulative effect that conveys a message of stability and control. Using a single source of truth platform can improve upon every task with speed and seamless efficiency. With these high-caliber tools, users are free to spend time and energy on more productive tasks to cultivate better-informed decisions and more accurate forecasts.
Increase visibility and efficiency in risk management
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