Central banking risk management critical as monetary tightening phase develops

Central banking risk management enters a most crucial stage heading into the delevering and monetary tightening phase without disrupting markets and economies. Global central banks are walking a tight rope in a kerosene-soaked leveraged landscape, and are faced with the task of unwinding balance sheets in a rising interest rate environment with the looming threat of trade wars. Stabilization must start internally with a galvanized technology infrastructure that ensures the most robust data collection, analytics and reporting capabilities to enable sound forecasting, decision-making and optimal execution.

The expanding role of central banks

Since the financial crisis, the role of central banks has expanded beyond inflation targeting with interest rate tools. The central bank intervention through asset purchase programs and rounds of quantitative easing (QE) have arguably worked to stimulate economies, lower unemployment, lift financial markets and control inflation. Central banks have been forced to not only adapt to changing landscapes but also anticipate shifting conditions and gauge how policy decisions will impact economies. The unprecedented nature of events and actions have left central banks with very little margin for error.

The impending unwinding phase

In the last decade, global central banks have printed $10.3 trillion of money resulting in $2.1 trillion in growth. While consumer inflation has been kept in check, many argue that the real inflation has occurred in financial assets stimulating a leverage bubble. Thus, the necessity of unwinding balance sheets and instituting monetary tightening is becoming a top priority. The European Central Bank has tentatively planned to end quantitative easing in 2018 and commence interest rate hikes in March 2019, according to Reuters, setting the tone for smaller central banks around the world. Precision risk management during this paradigm shift is mission critical.

Central banking risk management enters crucial stage

The nearly decade long zero-interest rate policy period was arguably the easy stage for central banks. The true measure of success will rely on how well they perform during this delevering phase where the proverbial training wheels are taken back off the markets. The telegraphed monetary tightening phase will subject markets and economies to volatility. Central banking risk management during this stage is most crucial as they will have to contain inflation without dampening economic growth or disrupting business cycles, all the while guarding against systemic risks.

Bolstering technological infrastructure

Central banks need state-of-the-art platforms that enable seamless management of investment portfolios, loan activities, foreign exchange, interest rate, precious metals and energy derivatives. Access to the most markets and asset classes is imperative. Adapting to changing conditions and staying ahead of the curve requires a technological infrastructure that is flexible, adaptable and scalable.

A single solution

Necessity is the mother of invention. The need to accommodate complex data analytics, risk management and cross-asset portfolio management with seamless transaction execution integrated with flexible audit and accounting support is ideally solved with a single solution: an integrated suite of functions from credit and risk monitoring and reporting and business process automation, to document and collateral/margin management. The cumulative effect is likely optimum engagement.

Automation and single source of record

Having all financial entities and vehicles on one system — from pension funds to precious metals — can improve streamlined middle- and back-office operations through automation and consolidation of key functions in a single source of record. A unified system bolsters effective market monitoring, stress testing and scenario planning capabilities.