IMF working paper calls for central banks to incorporate non-financial risk management

A new working paper from an International Monetary Fund official has called for non-financial risks to be incorporated into the way central banks are run.

The paper, which it is stressed does not reflect the official views of the IMF itself, was written by the Washington-based institution’s Financial Sector Expert Ashraf Khan, a former official at the Dutch central bank specializing in governance.

“It is important for central banks to understand the value of incorporating nonfinancial risk management into their strategic planning and governance framework,” he writes. He argues that effective governance is “of utmost importance” for central banks trying to achieve their goals.

The key pillars of central bank governance are identified as their official mandates, independence, accountability and transparency, and internal governance.

“But it is nonfinancial risk management of central banks that has received the least attention,” Khan notes, saying such issues have “largely overlooked” – although nonfinancial risks carry potentially large adverse effects for central banks.
Central banks should consider integrating financial and nonfinancial risk management as well as “quantifying as much as possible nonfinancial risks”. In addition, central banks could look at the tools and frameworks that have been developed “outside the realm of central banking”.He suggests that the IMF itself could examine how to further integrate issues of internal governance of central banks. The 51-page paper – ‘Central Bank Governance and the Role of Nonfinancial Risk Management’ – is available here.

It comes as Bank of England Governor Mark Carney over the weekend stressed that a priority for the high-level Financial Stability Board (FSB) that he chairs would be to address new vulnerabilities in the financial system, including potential risks associated with “market-based finance, asset management activities, conduct, correspondent banking and climate change”. The remarks came in a letter to G20 Finance Ministers and Central Bank Governors ahead of a summit in Shanghai over the weekend.

The summit itself reasserted a commitment to exploring green finance options. Under the Chinese Presidency, the G20 earlier this year launched the Green Finance Study Group, co-chaired by China and the UK, to mobilize private capital for green investments; the UN Environment Programme acts as its secretariat.

The official communiqué from the summit confirmed a commitment to “rationalize and phase out” inefficient fossil fuel subsidies over the medium term. “Further, we encourage all G20 countries to consider participation in the voluntary peer review of inefficient fossil fuel subsidy that encourages wasteful consumption.”