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Chapter 6: Financial Risk Management

...The Crown bears significant risk from a wide variety of sources.  Crown risk management is needed to support delivery of government funded services, and economic and social outcomes...

  • Chapter summary
  • Why manage risk?
  • Managing risk
  • Implications of the Canterbury earthquakes
  • Future developments

Chapter summary

Risk affects governments' ability to cost-effectively deliver on their objectives. This chapter focuses on the financial implications to the Crown of a wide variety of risks, including many non-financial risks.

Effective financial risk management is important because it can raise the living standards of New Zealanders by increasing New Zealand's resilience to shocks. This maximises the benefits and minimises the costs of publicly funded goods and services and improves economic and social outcomes.

Given the breadth of governments' objectives, Crown risk management needs to be aware of risks well beyond those that directly relate to its own asset and liability holdings. These risks can be some of the largest that the Crown will ever face - such as an international economic or financial crisis, a global pandemic or a natural disaster at home. These require astute management.

To manage this diverse range of risks effectively, a comprehensive and cost-effective framework needs to be in place which systematically and continually assesses risk.

The Crown's risk management framework generally involves holding agencies responsible for the risks that they individually face, subject to some central guidance and coordination for risks with broader national implications. This is because agencies are generally best placed to understand their own risks. These processes have worked well under a wide range of circumstances, although there is scope to strengthen the framework further through the development of a more complete understanding of the risk exposure of the Crown as a whole. This issue will gain in importance as the balance sheet grows and becomes more heavily weighted towards financial assets, which expose the Crown to new forms of risk.

A focus in the years ahead will be to better understand aggregate Crown risk to enable more effective and integrated risk management practices. An assessment is necessary on whether efficiencies can be captured while ensuring that total risk exposure remains within the risk appetite of governments.

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