Latvijas Banka manages financial and operational risks. The goal and basic principles of risk management at Latvijas Banka are set out in the Risk Management Policy of Latvijas Banka that is approved and followed by the Council of Latvijas Banka.
Financial risks
The aim of managing financial risks at Latvijas Banka is to minimise the adverse effects they could have on Latvijas Banka's financial position and financial performance if there are adverse changes in financial market factors or a counterparty default.
Latvijas Banka manages financial risks, which are market risk from price, interest rate and currency risks, together with credit risk and liquidity risk, by following the predetermined financial risk limits and taking measures to preserve the value of investments while ensuring there is sufficient liquidity and income generation over the medium and longer term (see also the subsection Risk management of the section Investment management), and that the principles of sustainability are followed.
Given that climate change could have a long-term adverse impact on Latvijas Banka's financial results, Latvijas Banka has introduced a framework for managing climate change risks. It is expected that the disclosure of sustainability parameters will be developed over time, and that improvements will be made, particularly to indicators and data standards, and also to data quality. The current framework for managing climate change risks will also be enhanced as progress is made across the industry.
Latvijas Banka's exposure to financial risks and the magnitude of those risks are primarily determined by its investments in financial instruments and by the single monetary policy operations of the Eurosystem and the sharing of the resulting risks and financial results. Latvijas Banka's financial assets are mostly exposed to market risk and credit risk. The Council of Latvijas Banka considers reasonable risk estimates and decides on the provisions that need to be made for the financial risks associated with Latvijas Banka's investment management and other financial transactions, and on using those provisions should the risks materialise.
Operational risks
The operational risks of Latvijas Banka are managed to ensure that processes or projects efficiently achieve good-quality results within the time frame specified for them, and that the implementation of processes is continuous, appropriate and secure, and mitigates any negative impact there could be on Latvijas Banka's ability to accomplish its tasks, on its reputation, or on its financial position and financial results. Latvijas Banka's operational risks are managed under a uniform operational risk management framework.
| Major operational risks | Objective of governance |
|
Compliance risks, including preventing conflicts of interests, anti-corruption controls, protection of personal data, prevention of money laundering and terrorism and proliferation financing, and ensuring the protection of the working environment |
To ensure compliance with the requirements in the legal acts governing the operation of Latvijas Banka and its staff and their conduct in executing their official duties and responsibilities. |
| Business continuity risks | To mitigate any adverse effects or interruptions to the execution of critical processes where those effects could have negative consequences for the Latvian financial system or impede Latvijas Banka in its tasks. This means ensuring the uninterrupted execution of critical processes or the prompt and complete restoration of them in the event of any disruption or interruption, and the efficient management of incidents. |
| Physical security risks | To ensure the physical security of people on the premises of Latvijas Banka and of those actual premises, and of the transportation of valuables and of events organised by Latvijas Banka. The priority is to protect the life and health of individuals. |
| Information security risks | To prevent unauthorised disclosure or misuse of confidential information, classifying that information by its degree of confidentiality and ensuring appropriate protection for it. It is equally important to ensure that these protective measures do not hinder Latvijas Banka in providing non-classified information to its cooperation partners and the public. |
| Risks related to information systems, including cyber security risks |
To prevent any negative impacts on the availability, security and integrity of the information systems and infrastructure of Latvijas Banka. Information systems at Latvijas Banka are classified by their importance for Latvijas Banka's tasks and by the confidentiality, integrity and availability requirements for the data that are to be processed, with appropriate physical and logical protection set for each level of classification. |
Latvijas Banka manages operational risks across processes and projects by classifying the processes and risks and assessing how those risks could affect the outcomes of the projects or processes, and by using this classification to decide and execute the most effective actions for ensuring appropriate risk management. The Operational Risk Management Department is in charge of maintaining a common operational risk management framework, organising the processes of operational risk management and incident management, and providing regular information on operational risk management as required by law. The risk management process is based on the best practices in the field and concentrates the resources intended for operational risk management, thus creating a more efficient model for managing the process. The Operational Risk Management Committee of Latvijas Banka coordinates operational risk management at the bank.
Latvijas Banka places paramount importance on equipping employees with the education and training they need to navigate the most critical operational risks effectively, and it conducts tests on a regular basis.
Significant efforts were made in 2023 to enhance the operational risk management framework by considering evolving trends in risk management, accumulated experience, the integration of the FCMC into Latvijas Banka, and changes in the external and internal environments. Operational risks were managed appropriately in 2023, and the risk mitigation measures that were implemented limited those risks to acceptable levels.