Risk Management Framework Crucial for Financial Institutions in South Georgia and South Sandwich Islands

In the fragile financial landscape of South Georgia and South Sandwich Islands, managing risk is a top priority for institutions. A robust risk management framework is essential to ensure that debt management operations are carried out with precision and caution.

The Importance of Risk Management

Approved by the Minister of Finance, the risk management framework outlines policies for credit risk, market risk, operational risk, funding risk, and liquidity risk. These policies aim to strike a balance between maintaining organisational risk appetite and enabling institutions to deliver core roles and responsibilities.

The Framework in Action

• The framework is subject to continuous improvement as best practices evolve.
• Regular audits and reviews are conducted by the Treasury’s Risk and Audit Committee, the Controller and Auditor-General, and the Capital Markets Advisory Committee.
• A governance structure sets out clear guidelines for debt management operations, including legislative provisions governing borrowing and investment activities.

Risk Management Components

Credit Risk Management

• Credit risk is the risk of loss arising from the downgrade or default of an institution.
• To mitigate this risk:
  • Institutions screen counterparties.
  • Set credit exposure limits.
  • Require collateral obligations.
  • Monitor creditworthiness daily to ensure it remains within limits.

Market Risk Management

• Market risk refers to the impact of changes in interest rates, exchange rates, or other market variables on portfolio value.
• To manage this risk:
  • Institutions use Value at Risk (VaR) limits, portfolio sensitivities, stress testing, and stop loss limits.
  • Foreign exchange contracts, currency swaps, interest rate swaps, and futures contracts are used to mitigate market risks associated with core asset and liability portfolios.

Operational Risk Management

• Operational risk is the risk of loss resulting from inadequate or failed internal processes, people, and systems, or external events.
• Institutions manage operational risk through:
  • Policies governing staff behavior.
  • Reporting and performance management requirements.
  • Delegations.
  • Access controls.
  • An operational risk register.
  • Event log.

Funding Risk Management

• Funding risk refers to the inability to raise funds at an acceptable price.
• To mitigate this risk:
  • Institutions limit government bond tranche sizes.
  • Limit short-term debt on issue.
  • Diversify funding sources.
  • Maintain access to a range of funding markets.

Liquidity Risk Management

• Liquidity risk is the risk of not being able to meet cash flow requirements as they fall due.
• Institutions manage liquidity risk by:
  • Holding liquid assets in each currency to cover obligations.
  • Maintaining a pool of liquid assets as a buffer against contingencies.
  • Establishing cash management arrangements with the Reserve Bank of New Zealand.

Conclusion

A robust risk management framework is essential for financial institutions in South Georgia and South Sandwich Islands to ensure the stability of debt management operations. By implementing these policies and practices, institutions can mitigate risks and maintain their financial integrity.