Operational Risk Management and Business Continuity Planning for Modern State Treasuries

Management of financial risk is very important for the treasury operations of any ministry of finance. Ministry of finance bears responsibility for the management of very substantial government assets and liabilities, and for the management of many large value transactions, probably much more than any other government ministry or agency.

The large sums involved mean that any risk exposure can have damaging financial consequences on the budget outturn and the overall government balance sheet. But there is potentially also severe reputational and political damage associated with operational errors or failures, reflecting on the competence of the ministry of finance covering treasury operations.

Ministry of finance is potentially exposed to—and will have a particular appetite for exposure to—a wide range of risks. Figure 1 illustrates the perceived risks:

• financial risks: traditionally managed by a risk management unit located in the ministry of finance that includes market, liquidity, and credit risks

• business risks: such as new legislation, change of government, macro-economic performance and any other factors affecting the ministry of finance’s environment—these are often managed as part of the budget planning process.

• operational risks: a range of threats from loss of key personnel, settlement failure, and compliance failure, to theft, systems failure and building damage—operational risk management aims to ensure the integrity and quality of the operations of ministry of finance and treasury using a variety of tools including audit, recruitment policies, system  controls, and business continuity planning.

Awareness of operational risk is low in many countries, and very few ministries of finance have a business continuity and disaster recovery plan (BCP/DRP). Often it is perceived as something applicable only to the private sector and attracts little attention by senior management.

This is because it is not seen as important or a priority, there are inadequate resources allocated to establish and maintain an operational risk management (ORM) framework including BCP/DRP, responsibility is delegated to information technology, and it becomes a one-off project rather than an integral part of the day-to-day treasury operations. Management neglect is often at fault with the belief that “it won’t happen to me”.

Ian Storkey. Fiscal Affairs Department INTerNATIoNAl MoNeTAry FUND. Prepared by Ian Storkey Authorized for distribution by Sanjeev Gupta November 2011.

Operational Risk Management and Business Continuity Planning for Modern State Treasuries