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Central Bank Risk Management: A Framework for Effective Governance

In an effort to strengthen its risk management practices, the Solomon Islands Central Bank (CBSI) has been advised to ensure effective governance structures are in place to facilitate open dialogue and debate on policy options.

The Limitations of the Three Lines of Defense Model

According to experts, policy risks are generally managed outside of the formal three lines of defense model. The model, which consists of a first line of defense comprising departmental risk champions, a second line of defense composed of risk management staff, and a third line of defense comprised of internal audit and external auditors, is not sufficient on its own to manage policy risks effectively.

Recommendations for Effective Governance

To address this gap, the CBSI has been recommended to establish effective governance structures that promote open dialogue and debate on policy options. This can be achieved by:

• Clear Roles and Responsibilities: Clearly defining risk management roles and responsibilities, aligned with the three lines of defense model.
• Adequate Resourcing: Ensuring adequate resourcing and training for the second line risk management function to support the implementation of recommendations set out in this report.
• Risk Working Group: Establishing a Risk Working Group (RWG) chaired by the deputy governor to maintain ongoing oversight of the CBSI’s risk profile.
• Recurring Item on Executive and Board Agendas: Including risk management as a recurring item on executive and board agendas to ensure structured and quarterly oversight of risks.
• Risk Oversight by the Board Audit Committee: Including risk oversight in the terms of reference for the Board Audit Committee (BAC) to enable the committee to separate out second-line oversight from control oversight.

Additional Recommendations

• Risk Appetite and Tolerances: Establishing a formal risk appetite statement, defining the bank’s tolerance levels for strategic, financial, and operational risks. This will provide a clear framework for managing risk and ensure that management is aware of the limits within which they must operate.

By implementing these recommendations, the CBSI can strengthen its risk management practices, ensuring effective governance structures are in place to facilitate open dialogue and debate on policy options.