The decision-making framework for investment activities and risk management involves several parties within the Bank of Finland’s organisation. The risk control function has been detached from the Bank of Finland’s Banking Operations department to become a new independent risk control unit under the Administration department.
For the conduct of its tasks, the Bank of Finland holds a foreign reserve portfolio and euro-denominated financial assets. The bulk of the Bank of Finland’s financial assets is invested in interest rate instruments. Investment activities concerning foreign reserves and euro-denominated financial assets are exposed to various risks, of which the most significant are market, credit, liquidity and operational risks.
The main market risk to the central bank’s assets is generally exchange rate risk. The other market risks from the point of view of Bank of Finland’s investment activities are interest rate risk and risk related to the price of gold.
The risk management of investment activities involves the identification, measurement and limitation of risks. The investment of foreign reserves and euro-denominated 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 and 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 with the help of limits and by spreading the investments among different currencies.
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 possible violations of limits are reported independently of investment activities.
Definition of risks
Exchange rate risk refers to the risk that the net value of the Bank’s assets decreases in response to exchange rate changes.
Interest rate risk refers to the risk that the net value of the Bank’s assets decreases in response to interest rate changes.
Broadly speaking, credit risk means the risk that there is a change in the credit standard of a counterparty to a financial transaction or an issuer of securities. In practice, this may mean a credit rating upgrade or downgrade or a counterparty or issuer default.
Liquidity risk refers to the risk that the Bank is unable to meet its obligations in time because its assets take time to convert into cash or they can only be converted for less value.
Operational risk refers to the risk that losses or extra costs arise from internal processes, personnel, systems or external factors.
For more information on risk management and control in investment activities, see the Bank of Finland’s Annual Report at