Risks are generally defined as uncertainty of future outcome.
The Council of the Croatian National Bank formulates the strategy and policy for international reserves management and sets out the risk management framework.
Credit risk is the risk that the counterparty will not settle its obligation i.e. the possibility that invested funds will not be recovered in full or within the planned schedule. The CNB limits exposure to credit risk by investing in highly rated government bonds, collateralised and non-collateralised deposits with financial institutions with high credit rating, and by limiting the maximum permitted exposure for each investment category.
Interest rate risk
Interest rate risk, or the risk of a fall in the value of the international reserves portfolio due to a possible increase in interest rates, is measured by the average duration and is controlled by means of benchmark portfolios and by investing in the held-to-maturity portfolio. When interest rates increase, bond prices fall. Interest rate risk is controlled by means of benchmark portfolios.
A benchmark portfolio is an "imaginary" portfolio comprised of instruments in which international reserve assets may be invested. Instruments of a benchmark portfolio are selected in such a way that the entire benchmark portfolio meets the required risk-return profile, thus reflecting the long-term investment strategy for CNB's reserves.
Currency risk arises from currency fluctuations between the kuna and the euro and the kuna and the US dollar.
Liquidity risk is controlled by investing reserves into readily marketable instruments. Liquid assets include all assets that may be turned into cash within three days without a significant impact on their fair value.
Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. Operational risk can be controlled by strict separation of functions and responsibilities, precisely defined methodologies and procedures, and regular internal and external audits.