Risk Management in the Reserve Bank: A 2003 Perspective

Article excerpt

The December 1999 issue of the Bulletin contained an article describing the then newly formed Risk Assessment and Assurance Department in the Reserve Bank and explaining how the Bank managed its risks. This article provides a 2003 perspective on these issues.

1 Opening comment

No discussion of risk management appears complete without a seemingly obligatory definition of risk management. In the case of the Reserve Bank, with its view of the importance of an integrated approach to this subject, the definition is best considered in two parts: "risk" and "management".

Risk is defined in the traditional sense in that it refers to both the probability of an event and the consequence or impact of an event should it occur. The implicit assumption is that the consequence or impact will be negative relative to the objective of the activity being referred to, but this need not be so. However, it is on the basis of the implicit assumption of negative consequence that we operate.

The term 'management' needs no definition here other than to say that it is used in its usual context, meaning the web of authorities and processes used to guide an activity toward the objective being sought.

So, in respect of the Bank, risk management is about better identification, monitoring and management of events that could frustrate intended outcomes. It should make success more certain by improving the management of the downside of activities undertaken by the Bank.

2 General philosophy on risk management

Consistent with the general philosophy of it being an integral part of the general management task, risk management is not seen as a separate task or activity within the Bank. Risk management is a process fully integrated with the overall management task. This task is made up of:

* An open policy development and implementation process with active participation by a broad range of personnel with a variety of responsibilities and perspectives. This occurs primarily through participation in the various internal committees described in the Governance section of the 2002/03 Annual Report. (See box 1 for a summary.)

Box 1

Governance structure

The Bank's governance structure comprises three main
elements: the Board of directors; the Governor; and the
internal management structure.

Board of Directors

The Reserve Bank has a Board of Directors. The Board of
Directors must comprise not less than five and not more
than seven non-executive members appointed by the
Minister of Finance, and the Governor. As a result of a
recent amendment to the Reserve Bank of New Zealand
Act, the Board is chaired by a non-executive director,
appointed by the non-executive members of the Board.

The role of the Board of Directors is different from that of
the Board of a listed company. The Reserve Bank's Board
has no involvement in directing Reserve Bank policy,
monetary or otherwise, or in directing the use of the Bank's
resources. These responsibilities are vested solely in the
office of Governor. Rather, the Board's primary function
is to monitor the performance of the Governor and the
Bank, on behalf of the Minister of Finance. The Board
does this by holding monthly meetings at which it receives
extensive briefings on the Bank's activities, decisions and
policies. At these meetings, the Board also provides advice
to the Governor, typically on the state of the New Zealand
economy and internal governance issues.

The Board also has an Audit Committee. All three members
are non-executive directors. The Board Audit Committee
monitors the internal audit function, receives repots from
the Bank's external auditors and reviews the Bank's annual
financial statements.

The Board also has responsibilities in the appointment of
the Governor and Deputy Governor. The Governor is
appointed (or re-appointed) by the Minister of Finance
only on the Board's recommendation. …