Financial and operational risk management

Abstract icon Danmarks Nationalbank is - in performing its functions as central bank - exposed to a number of risks. They can be divided in financial risks on portfolios, risks on monetary-policy counterparties and operational risks. In order to control and monitor these risks a number of guidelines, procedures and systems are established.

​​​Financial risk on portfolios

Danmarks Nationalbank's portfolios comprise the foreign-exchange reserve and the domestic securities portfolio. The foreign-exchange reserve is mainly invested in the money market, central-bank deposits and government bonds in euro and dollars. The domestic securities portfolio predominantly comprises mortgage bonds, mostly fixed bullets with short maturities.
These portfolios expose Danmarks Nationalbank to financial risks such as the risk of credit losses or the risk of capital losses resulting from fluctuations in interest rates, gold prices, etc. Some risks are related to the fixed-exchange-rate policy, which requires a large and liquid foreign-exchange reserve. Others reflect how Danmarks Nationalbank incurs risks in the expectation of achieving a reasonable return.

Risks on monetary-policy counterparties

Danmarks Nationalbank provides monetary-policy loans and, to facilitate settlement of payments, also intraday credit to Danish banks and mortgage banks. Danmarks Nationalbank also provides collateralised loans to banks' banknote holdings. In connection with its lending activities Danmarks Nationalbank incurs a risk of credit losses. This risk is reduced by providing loans, including intraday credit, only to monetary-policy counterparties that have pledged adequate collateral.

Operational risk

Operational risk management is the overall process of systematically analysing, assessing, monitoring, following up and reporting whether the planning of work tasks is sufficiently resilient against operational risks.
Operational risk management helps to ensure that Danmarks Nationalbank's business activities can be performed with focus on quality and professional skills, diligence, efficiency, security and control.

The operational risk management policy is set out in the 2nd edition of Framework for Operational Risk Management at Danmarks Nationalbank.
The framework summarises the policies and overall operational requirements applying to Danmarks Nationalbank. The framework is supplemented with detailed objectives and guidelines. The framework and guidelines are based on international standards, recommendations and inputs from international cooperation.
The framework applies to all aspects of Danmarks Nationalbank's conduct of its business and to its production environments, regardless of where the activities are carried out.

The overall operational risk management encompasses classification of business activities and preparation of assessments of Danmarks Nationalbank's operational risks. A suitable level of controls is determined and implemented on the basis of the critical importance of the business activity and the associated risk assessment, bearing in mind the threat scenario at any time.
These controls include: 

  • Security measures to prevent, provide protection against or limit the consequences of external as well as internal threats, including human errors, process errors or system errors. Security measures must be planned and implemented so that employees and Danmarks Nationalbank's valuables are at any time adequately protected, taking the current external and internal threat scenario into account.
  • Procedures constitute an element of the overall operational risk management, designed to ensure that day-to-day work is carried out as determined, and while minimising the probability of error.
  • Business continuity aiming at continuous performance of Danmarks Nationalbank's core responsibilities of maintaining a safe and secure currency system and facilitating and regulating the traffic in money and the extension of credit. In the event of major operational disruptions, seamless continuation of core responsibilities at an adequate level must be ensured, whenever possible using Danmarks Nationalbank's established facilities, procedures and organisational structure, until operations have been normalised.

In order to continually keep operational risk at a suitable level, regular controls and follow-up are performed with a view to ensuring that the organisation adheres to the Framework for Operational Risk Management.

Despite the controls in place, incidents may occur. Operational risk management also includes addressing incidents responsibly and examining the possibilities of reducing the probability of or mitigating the consequences of future incidents.