Guidance for Operational Risk Management in Government Debt Management

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Operational risk is defined as ―the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events‖ (Basel II, June 2004). In debt management operations, the categories of risks, such as market risk (exchange rate and interest rate risk), credit risk, refinancing risk and liquidity risk, are relatively well known; however operational risk is not. The area has not been given due attention to by government debt managers in developing a risk management framework. A similar conclusion on aspects pertaining to operational risk management is borne out from the early results of the World Bank’s assessments using its government Debt Management Performance Assessment (DeMPA) tool.

The results of the DeMPA exercise indicate significant deficiencies among countries on operational risk management. As at end-December 2009 from among the 27 finalized DeMPA reports, almost all of these countries had either weak or non-existent frameworks for operational risk management. Among the assessed countries, only one quarter of the countries met with the minimum effectiveness requirements3 for ―debt administration and data security‖ and only six percent of countries demonstrated effective practice for aspects relating to ―segregation of duties, staff capacity and business continuity‖ (these are as covered by the DeMPA tool. The DeMPA indicators and a more detailed description of the assessment results are presented in Box 1 and Annex 1, respectively. Download free Guidance for Operational Risk Management in Government Debt Management.pdf here

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