Watching The Watchers: Forward-Looking Assessment And Challenge Of A Central Bank’s Own Financial Risks - Speech By Andrew Hauser, Bank Of England, Executive Director, Banking, Payments And Financial Resilience At The GARP 18th Annual Risk Management Convention, New York, 7 March 2017

Introduction

Thank you very much for the opportunity to speak to you today.

The theme of this conference has been how to understand, and respond to, ever more diverse risks: from the rise of populism and geopolitics to the opportunities and threats of new technology; from new forms of financial risk in banks, capital markets and further afield, to the latest trends in stress testing.

Central banks of course worry about these things too, in pursuit of monetary and financial stability. Indeed we are so good at worrying, we may be one of the few groups of people that can make Chief Risk Officers look chilled out by comparison! But historically, for the Bank of England at least, much of that anxiety has been outward-facing, focused on the ways in which private sector balance sheets might overheat, rather than on our own financial exposures. And that reflects the fact that for long periods in the past, our market operations were relatively simple and low-risk.

All of that has changed in recent years as central banks have taken exceptional actions to stabilise economies and financial systems, driving a huge expansion in the scale and complexity of our market operations and balance sheet exposures. Those actions have delivered vital policy outcomes. But they have also led to entirely appropriate demands for central banks to demonstrate the highest levels of professionalism, transparency and accountability in their management of what are, ultimately, public exposures.

As Executive Director at the Bank of England in charge of our second line financial risk function, I want to explain how we have responded to these developments: setting out the new framework, structures and tools that we have put in place to monitor and challenge our own financial risk – and illustrating them with some practical case studies. A central goal of our work has been to apply the latest thinking in private sector risk management wherever we can. But that has also highlighted a number of areas where central banks have to handle risk in very different ways to commercial banks. Drawing out those similarities and differences will be a key subsidiary theme of my remarks, and will I hope help frame a lively discussion later in our session today.