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- Seminar on Financial Risks Management in Central Banking
- 1. Market Risk
Levels of TE limits depend on past investment records and volatility of returns.
Erkki Liikanen: Central banking and the risk management of central banks - what are the links?
Both benchmark and TE have to be approved by the executive committee and reviewed annually. All assets are subject to credit risk exposure and the bank of Thailand has a guideline for minimum acceptable credit rating to be investment grade and limit the maximum amount for each credit risk levels.
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The higher the credit risks, the lower the amount allowed for investment. In addition, there is also a guideline for concentration risks to avoid having too much credit risk exposure in any one country. The Bank of Thailand has a strict guideline for credit risk exposures with commercial banks such as high minimum credit rating for safety and limits the amount of transactions the Bank of Thailand has with each counterparty.
- Official Reserves Management.
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Similar to government bonds the Bank of Thailand diversifies across various counterparties to reduce the concentration of credit risks. Each credit risk limit must be reviewed and approved by the executive committee and updated periodically depending on the changing financial environments. The Bank of Thailand deals with liquidity risks by allocating a separate fund for the Liquidity Portfolio and has limited the holdings of illiquid assets such as bank deposits to a level such that it will not incur large losses when wanting to liquidate those assets.
As of now, Repurchase Agreements and Interest rate futures are included in the asset universe. The bank of Thailand values the official reserves daily using the marked-to market method.
Seminar on Financial Risks Management in Central Banking
The department responsible for evaluating, marking-to-market daily portfolio values and risk management is completely independent from the office of reserves management. Furthermore the bank of Thailand issues a monthly return and risk attribution report for use in risk budgeting analysis.
The organisational structure for Bank of Thailand BOT 's foreign currency reserve management operations comprises of 2 layers reflecting 2 core functions. Execution of transactions in relation to foreign currency reserve management operations via Reserve Management Department and engage in active management in support of IC-designated investment strategies whilst adhering to the RMC-approved risk management policy and framework.
1. Market Risk
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D9 Government bond turnover D30 Holdings of central government debt securities D31 Non-resident holdings of individual bonds D35 Holdings of Kauri bonds. News Reserve Bank's risk management model wins international award for innovation.
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Reserve Bank's risk management model wins international award for innovation Release date. Background Central Banking Publications is a financial publisher owned by Incisive Media specialising in public policy and financial markets, with emphasis on central banks, international financial institutions and financial market infrastructure and regulation. Hence, an integral part of the foreign reserves management process is the risk management when investing funds in various financial instruments.
The National Bank manages the credit risk, as a risk of decreasing the foreign reserves value due to illiquidity, insolvency and downgrading of credit ratings of countries, financial institutions or security issuers, by placing foreign reserves in consistence with selection criteria and exposure limits to countries, financial institutions and security issuers.
The National Bank manages the liquidity risk, as a risk of unavailability of ample liquid assets, by maintaining adequate level of liquidity portfolio, placed in short-term instruments with equal maturity distribution, and by placing the investment portfolio in market and liquid instruments.
The National Bank manages the interest rate risk, as a risk of decreasing the foreign reserves value due to shift in market prices of instruments in which foreign reserves are being placed, by determining and maintaining the target modified duration of the investment portfolio, as a strategic objective which reflects the optimal level of expected return on foreign reserves investment, having defined acceptable risk level.
Currency risk is a risk of decreasing foreign reserves value due to the movements in foreign currencies in which foreign reserves are placed and held. The part of foreign reserves in Euro is not exposed to currency risk, due to the strategy of de facto fixed exchange rate of the Denar against the Euro.