INSEAD Library

Includes bibliographical references and index

Digitized

Risk Management for Central Banks and Other Public Investors Contents List of figures List of tables List of boxes Foreword Jose-Manuel Gonzalez-Paramo page x xii xv xvii Introduction Ulrich Bindseil, Fernando Gonzalez and Evangelos Tabakis xx Part I 1 Investment operations Central banks and other public institutions as financial investors Ulrich Bindseil 1 3 3 4 10 17 23 29 34 41 48 1 Introduction 2 Public institutions' specificities as investors 3 How policy tasks have made central banks large-scale investors 4 Optimal degree of diversification of public institutions' financial assets 5 How actively should public institutions manage their financial assets? 6 Policy-related risk factors 7 The role of central bank capital ­ a simple model 8 Integrated risk management for public investors 9 Conclusions 2 Strategic asset allocation for fixed-income investors Math Koivu, Fernando Monar Lora, and Ken Nyholm 49 49 50 68 1 Introduction 2 A primer on strategic asset allocation 3 Components of the ECB investment process 4 Forward-looking modelling of the stochastic factors 5 Optimization models for SAA under a shortfall approach 6 The ECB case: an application 3 75 89 99 Credit risk modelling for public institutions' investment portfolios Han van der Hoorn 117 117 118 122 143 155 1 Introduction 2 Credit risk in central bank and other public investors' portfolios 3 The ECB's approach towards credit risk modelling: issues and parameter choices 4 Simulation results 5 Conclusions 4 Risk control, compliance monitoring and reporting Andres Manzanares and Henrik Schwartzlose 157 157 159 161 179 189 196 207 207 208 213 219 1 Introduction 2 Overview of the distribution of portfolio management tasks within the Eurosystem 3 Limits 4 Portfolio management oversight tasks 5 Reporting on risk and performance 6 IT and risk management 5 Performance measurement Nerve Bourquin and Roman Marton 1 Introduction 2 Rules for return calculation 3 Two-dimensional analysis: risk-adjusted performance measures 4 Performance measurement at the ECB 6 Performance attribution Roman Marton and Hervé Bourquin 222 222 224 228 241 257 267 1 Introduction 2 Multi-factor return decomposition models 3 Fixed-income portfolios: risk factor derivation 4 Performance attribution models 5 The ECB approach to performance attribution 6 Conclusions Part II: Policy operations 7 Risk management and market impact of central bank credit operations Ulrich Bindseil and Francesco Papadia 269 271 271 274 1 Introduction 2 The collateral framework and efficient risk mitigation 3 A cost--benefit analysis of a central bank collateral framework 4 Conclusions 284 300 8 Risk mitigation measures and credit risk assessment in central bank policy operations Fernando Gonzalez and Phillipe Molitor 303 303 307 315 318 337 338 1 Introduction 2 Assessment of collateral credit quality 3 Collateral valuation: marking to market 4 Haircut determination methods 5 Limits as a risk mitigation tool 6 Conclusions 9 Collateral and risk mitigation frameworks of central bank policy operations -- a comparison across central banks Evangelos Tabakis and Benedict Weller 340 340 342 348 353 357 1 Introduction 2 General comparison of the three collateral frameworks 3 Eligibility criteria 4 Credit risk assessment and risk control framework 5 Conclusions 10 Risk measurement for a repo portfolio -- an application to the Eurosystem's collateralized lending operations Elke Heinle and Math Koivu 359 359 360 366 368 376 379 1 Introduction 2 Simulating credit risk 3 Simulating liquidity-related risks 4 Issues related to concentration risks 5 Risk measures: Credit Value-at-Risk and Expected Shortfall 6 An efficient Monte Carlo approach for credit risk estimation 7 Residual risk estimation for the Eurosystem's credit operations 8 Conclusions 387 393 11 Central bank financial crisis management from a risk management perspective Ulrich Bindseil 394 394 396 399 416 418 422 434 437 1 Introduction 2 Typology of financial crisis management measures 3 Review of some key results of the literature 4 Financial stability role of central bank operational framework 5 The inertia principle of central bank risk management in crisis situations 6 Equal access FCM measures 7 FCM measures addressed to individual banks (ELA) 8 Conclusions Part Ill:. Organizational issues and operational risk 12 Organizational issues in the risk management function of central banks Evangelos Tabakis 441 443 443 444 445 448 459 1 Introduction 2 Relevance of the risk management function in a central bank 3 Risk management best practices for financial institutions 4 Six principles in the organization of risk management in central banks 5 Conclusions 13 Operational risk management in central banks Jean-Charles Sevet 460 460 463 465 468 469 471 472 476 1 Introduction 2 Central bank specific ORM challenges 3 Definition of operational risk 4 ORM as overarching framework 5 Taxonomy of operational risk 6 The ORM lifecycle 7 Operational risk tolerance policy 8 Top-down self-assessments 9 Bottom-up self-assessments 10 ORM governance 11 KRIs and ORM reporting 12 Conclusions References Index 479 483 484 488 490 507