Risk management and risk control

Management of financial risks

A significant proportion of the Bank of Finland’s financial assets are debt securities purchased for monetary policy purposes and claims on banks resulting from monetary policy implementation. The Eurosystem’s monetary policy measures are implemented on a decentralised basis among the different Member States and the ECB, but the risks and returns are largely shared among the national central banks. In the implementation of monetary policy purchase programmes, the Bank of Finland, in the same way as the other central banks, complies with the Eurosystem’s eligibility criteria and other risk-management rules.

The Bank of Finland’s financial assets consist of gold and foreign exchange reserves as well as, equity and real estate fund investments, and cash. The financial assets involve exchange rate, interest rate, credit and equity risks. Exchange rate risk is the most significant risk related to the Bank of Finland's financial assets.

The risk management of investment activities involves the identification, measurement and limitation of risks. The investment of financial assets is based on an investment policy defined by the Board of the Bank of Finland. Risks are measured with commonly-used risk management methods and, in practice, risks are limited by setting detailed limits on investment activities. Risks are also controlled by spreading the trades and investments among several counterparties and issuers based on limits and by diversifying the investments across different currencies.

The total risk exposure of the Bank of Finland's balance sheet is assessed using well-established methods. Market and credit risks to the balance sheet are measured by models based on Value-at-Risk. The risk assessment is supplemented with scenario analyses and stress tests.

Risk management of investment activities by the Bank of Finland has been entrusted jointly to the Administration Department's Risk Control and Financial Accounting Division and the Market Operations Department. The control of financial risks is the responsibility of Risk Control and Financial Accounting Division. Risk control involves the monitoring and assessment of risks and supervision of compliance with risk limits. Risk reports are produced on a daily basis, and any violations of limits are reported independently of investment activities and the execution of operations.

Operational risk management

The management of operational risks enables timely, risk-conscious decisions and ensures that any management actions are appropriate and proportionate. High-quality and effective risk management contributes to the achievement of targets. Risk assessment generates information on risks associated with various alternative actions and projects, allowing the analytical evaluation of benefits achieved and potential new risks.

The operational risk management process includes the identification and evaluation of risks, the determination of risk management actions, and the monitoring of risks and these management actions. The process also includes an assessment of the level of residual risk. The entire operational risk management process is conducted with risk management software.

Each supervisor is responsible for operational risk management in their area of responsibility. All personnel participate in the identification and management of operational risks as part of their duties. The Security and Property Management Division within the Administration Department coordinates and supports the divisions in operational risk management and maintains a risk portfolio consisting of identified risks. Operational risk management is steered by a committee on operational and cybersecurity risks.

The Bank of Finland's contingency and continuity management is integrally linked with operational risk management and functions as one of the controls for operational risks with very serious impacts. Continuity management also seeks to take into account such disruptions that cannot be identified in advance or anticipated. The Security and Property Management Division within the Administration Department steers the efforts related to contingency and continuity management. A joint preparation group of the Bank of Finland and the Financial Supervisory Authority is in place for these activities.