Creating a World-Class Central Bank

Creating a world-class central bank

Third edition

Central Bank network

August 2017

KPMG International

kpmg.com/centralbank Contents

04 Best of the best

Enhancing the sustainability of the 06 financial system

Business continuity management and 08 resilience to operational disruption

Transformation — building a 10 high-performance organization

Stepping up governance, risk 11 management and internal controls

Regulatory convergence and 12 harmonization of banking supervision

15 Overseeing payment systems

Implementing International Financial 16 Reporting Standards (IFRS)

Cyber security and digital disruption 18 implications

Effective financial oversight — 20 accountability and transparency

KPMG’s Central Bank network 21 Additional KPMG publications

Central banks must evolve to keep pace with economic, technological and marketplace developments. Nowhere is this truer than in the world’s high-growth countries, which face a race against time to modernize as local economies expand rapidly.

Central banks are crucial to a nation’s Although the range of responsibilities of national economies and the increasing economic well-being, tasked with central banks can differ widely between sophistication of their financial services developing and implementing policy countries, all share a common goal sectors. within its mandate, including monetary of maintaining the highest possible policy, currency and funds management. standards, to preserve the stability of the KPMG’s Central Bank network engages Many also regulate and supervise the economy and retain public trust. specialists across geographies to commercial banking system and stand leverage network capability and actively ready to act as a lender of last resort — In high-growth markets, central service central banks to help them a scenario all too familiar during the banks also face a race against time formulate and implement strategies and latest global financial crisis. to modernize in order to keep pace improve performance. with the rapid expansion of their

Key priorities for central banks

1 Enhancing the sustainability of the financial system 2 Business continuity management and resilience to operational disruption 3 Transformation — building a high-performance organization 4 Stepping up governance, risk management and internal controls 5 Regulatory convergence and harmonization of banking supervision 6 Supervising stability and regulatory compliance 7 Overseeing payment systems 8 Implementing International Financial Reporting Standards (IFRS) 9 Cyber security and digital disruption implications 10 Effective financial oversight — accountability and transparency

4 Creating a world-class central bank

Implementing major change

Following the global financial crisis, the central bank of a European nation was asked to deliver a broader mandate with more vigorous regulation. Professionals from the KPMG Central Bank network helped the central bank prioritize its objectives and bring in new technology and business processes, along with appropriate governance. With this assistance, the bank revamped its technology function, introduced online regulatory returns and updated security policies and set up a new, outsourced credit register. The KPMG Central Bank network’s role in stress testing and loan assessment was vital in assessing commercial banks’ capital requirements and collateral. In addition to improving its regulatory capabilities, the central bank has saved an estimated 10 million euros (EUR) in annual operating costs.

Managing costs and communicating with stakeholders

Central banks are typically under pressure to account to the government and the public for the money they spend on items such as staff, buildings and information systems. One of the world’s major central banks regularly prepares a report on its expenses and investments, breaking down costs and analyzing ‘actual’ against ‘plan’. A team from KPMG’s Central Bank network analyzed the report and the underlying management accounting processes and systems, providing the central bank with recommendations to further enhance the reporting and, at the same time, giving assurance to stakeholders on the relevance of the report.

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© 2017 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. Enhancing the sustainability of 1the financial system Increasingly, central bank governors are being asked to explain their contributions to advancing the sustainable development of their economies.

Financial systems and individual green finance. Central banks also need integration of environmental and financial institutions are increasingly clear reporting frameworks to explain social factors in the core duties and impacted by new and more disruptive, to society, and other key stakeholders, organizational processes of the bank, less predictive environmental and their contributions to improving the including: social challenges, such as climate sustainability of the financial system change, aging populations, large-scale and national economy. —— quantifying and assessing the involuntary migration, extreme weather financial risks which can arise events and resource scarcity. All these Not all central banks are taking from climate change and other challenges (and society’s responses action yet to adapt their scope of environmental and social issues to them) present financial risks which responsibilities, strategies, policies impact upon a central bank’s mission and organizational processes to this —— benchmarking of sustainability and core objectives. For example, new risk landscape.However, some performance against comparable climate change can affect the financial central banks have already started with institutions integrating environmental and social stability, resilience and longer-term —— supporting with determining prosperity of countries. risk factors in their core duties. For example, in 2017, the Bank of England effective strategies and policy Like other organizations, central formulated its strategic response to measures to mitigate financial risks banks need to adapt to this changing climate change. The Dutch Central Bank from climate change and other risk landscape. Effective integration is also active in this field. In 2016, it environmental and social issues of these environmental and social established The Sustainable Finance —— integration of environmental and risk factors in the core duties will Platform to promote and encourage social risk factors in core duties, likely become a critical capability in a dialogue on sustainable finance in organizational processes and the future for central banks. Central the Dutch financial sector. In addition, systems and governance structures banks must be able to understand it is conducting a thematic review and assess the scope and size into climate risk within its financial —— providing up-to date knowledge and of the risks that arise to financial institutions. In 2017, the Central understanding of regulatory changes stability from societal challenges Bank of Brazil issued guidelines of around the world in the field of (e.g. climate change) and the financial integrated risk management, including sustainability institutions which they supervise. environmental risk and, in 2016, the More longer-term, forward-looking Central Bank of Russia conducted a —— supporting with improving the and judgment-based supervision is review on green bonds. central bank’s sustainability needed to examine these financial performance of own organization, risks. In addition, they need to be How KPMG’s Central Bank such as sustainable procurement able to determine effective strategies network can help and carbon footprint of offices of the to make the financial system more bank resilient to any of these societal KPMG Central Bank network transitions and help the system to professionals work with central —— improving disclosure effectiveness adjust itself efficiently, for example, banks of varying degrees of size of sustainability performance of the by implementing policies to scale up and sophistication to advance the bank towards society and other key stakeholders.

6 Creating a world-class central bank

Measuring and managing climate-related financial risks

KPMG’s Central Bank network professionals support a major European central bank and the financial institutions which it supervises, with measuring and managing climate-related financial risks. The KPMG Central Bank network team supports with identifying and/or developing tools for measuring and managing climate-related financial risks and assessing current approaches and analyzing potential gaps. Improving the environmental performance of the bank’s operations A team of professionals from the KPMG Central Bank network supported a central bank in a key developed economy with improving the environmental performance of its own operations. The KPMG team helped with the development of a new environmental policy for the bank, including an overarching vision and ambition. In addition, it supported the design of a new governance structure for environmental performance management and with determining concrete measures to improve the environmental performance of the organization.

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© 2017 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. Business continuity management and resilience 2 to operational disruption Central banks and financial institutions have a shared interest in promoting the resilience of the financial system to major operational disruptions.

Business continuity is a clear priority Principle 1 states that sound business —— defining the business continuity for the financial industry. Recent acts continuity management applies to policy and processes of terrorism, cyber attacks and various all financial authorities and financial widespread natural disasters and industry participants and that the —— analyzing the risk appetite and pandemic diseases, along with the risk ultimate responsibility for business determining the impact scale for of energy and telecommunications continuity management rests with an disruptive events outages and information technologies organization’s board of directors and —— performing a business impact failures, have served to heighten that senior management. analysis to identify critical processes priority by underlining the substantial risk and their recovery time objectives of major operational disruptions to the Since then, central banks have been financial system. issuing regulatory frameworks for —— carrying out a risk assessment to business continuity management in determine the disruptive risks to Disruption of central banks processes their role of supervisory authority over which the bank is more exposed and could undermine trust and confidence financial institutions and have been that need treatment in the financial system stability from implementing their own business the public, national and international continuity management programs, —— defining a business continuity commercial banks, the government and often based on international business management strategy with international financial authorities with continuity management standards such preventive solutions to reduce risk very adverse economic and political as ISO 22301 and industry best practices. exposure and recovery solutions to consequences. In mature markets, the financial recover critical functions within the Business continuity management, a authorities have been promoting recovery time objectives significant component of operational financial industry crisis management —— developing crisis management, risk management, is a whole-of- exercises and testing the financial business recovery and IT disaster business approach that includes policies, system resilience to several disruptions recovery plans standards and procedures for ensuring scenarios (i.e. cyber attack, adverse that mission critical operations can be weather, avian flu). —— facilitating crisis management, maintained or recovered in a timely business recovery and IT disaster fashion in the event of a disruption. Its How KPMG’s Central Bank recovery tests and exercises purpose is to minimize the operational, network can help financial, legal, reputational and other —— carrying out internal audits to the material consequences arising from a The KPMG Central Bank network has BCM process, including ISO 22301 disruption by promoting the resilience advised financial institutions around compliance assessments and to the of the organization to potential threats the globe in the implementation of IT disaster recovery solutions that could cause major operational their business continuity management —— ensuring the continuous disruptions. programs. With a strong track record in improvement of the BCM process. delivering effective business continuity In 2006, the Basel Committee on management, the KPMG Central Bank Banking Supervision published the network can help central banks with: high-level business continuity principles.

8 Creating a world-class central bank

Implementing a Business Continuity Management System

KPMG’s Central Bank network professionals assisted a central bank to implement a Business Continuity Management System (BCMS) using the ISO 22301 Standard, to take the lead in compliance with business continuity management international best practices and to ensure the future maintenance and continual improvement of this function in the bank.

The implementation of the BCMS was conducted by the Risk Management Division with the support of the KPMG Central Bank network. The BCMS implementation program involved the whole organization — not only the business divisions initially in scope — payments system, assets markets, international reserves and operations — but also support divisions, such as accounting, human resources, organization and processes, institutional communication, infrastructure and security, information technology and internal audit. The program was strongly sponsored by the board of directors, represented by the Chief Risk Officer in all steering committees and communication with all interested parties was key to ensure the program success.

The team from the KPMG Central Bank network analyzed the context of the central bank to understand its processes, organization, facilities, information systems, major threats and risk appetite. Then, the team supported the bank in the definition of the BC Policy, BC Governance Model and BCMS processes.

The team of KPMG Central Bank network professionals conducted a business impact analysis (BIA) that allowed the identification of the client’s critical business processes and their recovery time objectives (RTO). The firm worked with the bank to identify the resources (people, information systems and facilities) required to recover critical business processes in minimum service levels. Also, the team conducted a risk assessment to understand the disruptive risks to which the bank is more exposed and that need treatment. As a result, the KPMG Central Bank network team defined the business continuity strategy with preventive solutions to reduce risk exposure and recovery solutions to recover critical functions within the recovery time objectives.

While the bank implemented the preventive and recovery solutions, the KPMG Central Bank network team defined the crisis management plan, business recovery plans and IT disaster recovery plans together with the business and support divisions of the bank.

The next step will be to assist in implementing the crisis management function, business recovery exercises and IT disaster recovery tests to ensure that the teams understand their roles in case of a disruption and the effectiveness of the recovery solutions and the BCMS performance evaluation, defining key performance indicators, training the internal audit team to perform BCMS audits and preparing the first management BCMS review with the board of directors. The final step will be to develop a BCMS maintenance plan with corrective and improvement actions for the next cycle.

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© 2017 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. Transformation — building a 3 high-performance organization Increasing quality and efficiency with a view to becoming a high-performance and innovative central bank Central banks need to stay ahead of the long-established work culture (some over To help clients predict and avoid these financial ecosystems in their countries many decades) impacting its employees. pitfalls, the KPMG Central Bank network by embracing the dynamics of new Any transformation and change requires has a core set of project managers and technologies and current working trends. tailored change management initiatives. directors who work with all of KPMG’s To achieve its strategic objective, a service networks to assemble the central bank needs to ensure it is fit for How KPMG’s Central Bank right team, the right approach and the purpose and has the higher motivation to network can help right delivery capability for any given move forward. transformational project or program, The KPMG Central Bank network such as: In order to achieve its higher purpose provides the understanding and insight of a motivated organization, the central to help central banks effectively navigate —— Conduct macro and micro bank needs to place the transition of the the transformation journey and help organization design. institution as a priority program. A key avoid the major causes of failure. objective is to build a human resource —— Develop job grading and framework that has the leadership skills Most transformations are relentlessly remuneration framework. to follow through the strategic values of complex whether they involve —— Prepare Job Description, and the bank. rolling out an incubated business, Workforce Analysis. undertaking a major operating model Transforming a central bank is always upgrade, or implementing major —— Prepare change strategy & plan. a challenge, as it traditionally has a organizational reform. Case study

An organization fit-for-purpose A central bank in a high growth market embarked on a transformation program to increase its quality and efficiency and to be the most innovative central bank in the region.

A team of professionals from the KPMG Central Bank network assisted the bank to validate its strategy and translated that into an organization design blueprint, which includes the enhancement of their operating model and recommendations for job profile, job level and FTE analysis to ensure the right people are at the right place in the right number.

The team also helped the bank to review the existing job grading and remuneration system and enhance it to ensure the criteria and weightings match the needs of the bank and that it is fit for purpose to support the execution of the bank’s strategy of transition to a high-performing culture.

The central bank’s governance framework was also enhanced by the KPMG Central Bank network team. The work included decision-making authority and reporting lines to ensure the governance framework facilitates the implementation of a robust review mechanism and promotes transparency in decision-making.

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© 2017 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. Stepping up governance, risk management and 4 internal controls Good governance is not just a box-ticking exercise for central banks; it underpins the integrity and stability of a country’s financial system. Eager to avoid a repeat of the financial benchmarking of performance against How KPMG’s Central Bank meltdown, the financial sector as a whole comparable institutions. network can help has had a big push on governance in recent The public and other stakeholders expect years. As the standard bearers of quality, KPMG’s Central Bank network full accountability and transparency central banks need to visibly raise the bar professionals work with central banks of to uphold political independence and in terms of independence, expertise and varying degrees of size and sophistication demonstrate that central bank policies are professionalism, not just as an example to to advance governance, risk management contributing to lasting economic growth. other institutions, but to help ensure the and overall operating standards, including: smooth running of the wider economy. In Not all central banks are yet equipped to addition to robust policies and systems, —— rethinking the organizational structure, meet such demands, while others are the governor and the executive and non- including core processes and systems undergoing fundamental changes, such executive board members should possess as increasing/decreasing their scope for banking activities and reserves exceptional skills and independence in of responsibilities and introducing new management order to manage and oversee the bank’s organizational processes. This may call for activities. —— refining the operation of the audit new organizational design and policies, as committee, executive management or Like any organization, central banks have well as training and recruitment to bring in risk management roles to manage performance, approve budgets, new skills. use resources efficiently and build strong —— assessing the quality of internal audit teams with the right capabilities. They —— enhancing financial reporting processes need clear reporting frameworks and and associated internal controls. Case studies

Rehabilitating the national banking system In a substantial exercise to value assets and liabilities, a KPMG Central Bank network team assisted the central bank and two commercial banks in the country to recapitalize. The KPMG Central Bank network mobilized a cross-border team of specialists in valuations, real estate, insurance and accounting, whose work has underpinned discussions between international creditors, the Ministry of Finance and the central bank. The subsequent full recapitalization (via the conversion of uninsured deposits into shares in the commercial banks) has formed a vital part of the restructuring and rehabilitation of the national banking system. Enhancing the risk management system The risks faced by central banks can be significantly different to those faced by commercial banks. Several years ago, one of the world’s major central banks decided to apply certain risk management requirements, which are obligatory for commercial banks in its jurisdiction, to its own internal processes. The KPMG Central Bank network team analyzed the application and implementation of those requirements. This resulted in recommendations to the board on updating and enhancing the internal requirements and on making the internal processes more effective in practice.

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© 2017 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. Regulatory convergence and harmonization of 5 banking supervision Regulatory convergence and the harmonization of banking supervision are key elements in building the European banking union.

In June 2012, member states of the —— Supervisory review and Competent Authorities (NCAs) and European Union agreed to create a evaluation process (SREP): The internal resolution teams from the European banking union to ensure ECB performs the SREP, based Single Resolution Board (SRB). strong supervision of EU banks on EBA guidance and detailed in —— On-site visits: For 2016, the ECB and address major weaknesses of an SSM manual, as a vital part of the banking sector that had been approved and staffed 185 on- their supervisory efforts. Directly uncovered by the financial crisis. site inspections (OSIs) in close supervised banks are reviewed The European Central Bank received cooperation with the NCAs, which annually with regard to their wide-ranging competencies for the provided 90 percent of the heads business model, governance and supervision of all 6,000 banks in the of mission. A range of supporting controls, risks to capital und liquidity euro area and, in November 2014, tools (such as Blind Spot Tracker, buffers. The ECB uses the results began directly supervising the top Market Place) were used to from the SREP to set bank-specific 129 banks under the framework of the enhance efficiency of the OSIs and capital requirements (beyond pillar 1 Single Supervisory Mechanism (SSM). to ensure the timely treatment of requirements). Since then, the ECB’s aims have been findings. The ECB and NCAs have to establish a common approach —— Stock-takes, thematic and often resorted to external support to day-to-day supervision, take targeted reviews: The ECB for such OSIs. harmonized supervisory actions and regularly conducts stock-take corrective measures and ensure the —— Supervisory priorities: In its third exercises and reviews to gain an consistent application of regulations year of operation, the ECB uses overview on practices in the banking and supervisory policies. a focused approach to identify sector, such as in the areas of key areas of future supervisory As the European banking sector is non‑performing loans (stock-take), activities, involving the NCAs, JSTs strongly fragmented in comparison BCBS 239/IT outsourcing (thematic and the ECB’s divisions for macro with other jurisdictions such as the US, review) or internal models (targeted and micro-prudential analyses, the ECB uses tools and instruments in review on internal models, TRIM). both a consistent and flexible manner as well as reports from various to achieve its objectives and to take —— Joint supervisory teams: To allow international bodies. These priorities into account the heterogeneity of the for flexibility in judgment, banks are closely linked to a stringent European banking sector in terms directly supervised by the ECB project structure as they involve a of size, business model and juridical are covered by an individual joint number of separate supervisory framework. Thus, central banks from supervisory team (JST). JSTs differ initiatives which, in some cases, are non-EU-countries may learn much in terms of size and background, implemented over more than one from the ECB’s code of conduct in are supported by a comprehensive year (e.g. for non-performing loans, banking supervision and how the ECB range of support functions (such as BCBS 239 or TRIM). Since the works toward regulatory convergence internal models, crisis management start of its operations, the priorities within the EU. The ECB’s tools and and risk analysis) and benefit from in banking supervision have instruments include the following: close collaboration between the ECB reflected the ECB’s commitment to and such institutions as the National internationally agreed standards.

12 Creating a world-class central bank

© 2017 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. —— Supervisory colleges and Office in Frankfurt, Regulatory Center of reviews to improve regulatory training services: To ensure close Excellence in London and EU Office in convergence collaboration between the ECB Brussels closely monitor any regulatory —— supervisory colleges or regular and, for example, the NCAs, the initiatives and developments and training sessions on key topics in JSTs and the SRB and also to reflect coordinate KPMG’s European activities risk, IT and accounting current developments in risk, IT and with banks and supervisors under the accounting in the ECB’s supervisory SSM. The KPMG Central Bank network —— conducting and/or documenting can help clients with: assessments, the ECB puts of dry-run exercises of recovery or particular emphasis on supervisory —— expert advice on topics related to resolution situations colleges (e.g. for recovery and the ECB’s supervisory priorities with —— project management of multi-year resolution) and internal training (e.g. the aim of ensuring that market best projects and initiatives for stress tests or IFRS 9). practices and standards are applied —— advising central banks on How KPMG’s Central Bank —— expert advice, insights and implementing or refining review network can help benchmarks on Pillar 1 and Pillar 2 processes of the banks under their (SREP) capital requirements supervision, leveraging the knowledge The KPMG Central Bank network has gained by supporting banks in their outstanding experience in advising —— organizing or supporting stock- comprehensive assessments. banks and central banks within the takes, thematic reviews or targeted European banking union. KPMG’s ECB Case study

Supporting European banks in the comprehensive assessment

In 2014, the ECB conducted a comprehensive assessment of all directly supervised banks. In this assessment, banks had to partake in an asset quality review (AQR) and in the 2014 EBA stress test.

Professionals from the KPMG Central Bank network either advised on the AQR or was the auditor of 93 out of the 128 directly supervised banks in the banking union throughout the 2014 comprehensive assessment.

KPMG Central Bank network profesionals also supported a large number of banks in their preparation for EBA’s and ECB’s stress tests (e.g. as part of the comprehensive assessment).

By advising banks in the comprehensive assessment, the KPMG professionals from the Central Bank network were able to help ensure that banks were able to comply with the goals and requirements of the ECB in order to achieve an effective comprehensive assessment, minimizing frictions between the ECB and the participating banks. The KPMG Central Bank network professionals were also able to gather extensive experience and build a deep understanding of the comprehensive assessment.

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© 2017 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. Supervising stability and 6 regulatory compliance Central banks have been at the heart of discussions and new rules on regulating and supervising commercial banks.

Commercial banks face a huge increase central banks and financial supervisors How KPMG’s Central Bank in regulatory demands for liquidity, of other countries when managing network can help capital requirements, recovery and international financial crises and resolution planning and customer-centric overseeing multinational groups. KPMG’s outstanding Regulatory Centers operations. Not surprisingly, many of Excellence offer telling insights into Regulatory oversight has taken on struggle to cope with the organizational the implications of regulatory change new urgency in the wake of the global and cultural change and the associated and the direction of developments financial downturn and central banks reporting and data aggregation around the world, including Basel III, want to be confident that they can requirements. Solvency II, EU initiatives and the Dodd- perform this task competently, spot Frank Act. This expertise is invaluable in: Central banks often have regulatory systemic or institutional weaknesses and and supervisory authority over reassure financial markets. —— improving regulatory supervision, financial institutions to ensure they The recent crisis demonstrated starkly to ensure that commercial banks are safe and operating in a stable adapt their structure, conduct and financial environment, to retain the the need for stability in the economy, the culture, data and reporting and risk trust of customers and the wider currency, the financial sector and within governance financial markets. individual financial institutions. Through monetary policy and macro- and micro- —— providing up-to-date knowledge and Central banks may assess which banks supervision, central banks can steady understanding of regulatory changes (if any) pose a risk to financial stability the economic conditions. To achieve this, around the world. and work more closely with these they may also have to redesign their institutions. They also coordinate with internal processes and systems. Case study

Getting up to speed with Basel

Basel compliance is a critical objective for all commercial banks and an emerging markets central bank asked the KPMG Central Bank network team to carry out a comprehensive training program for all the country’s banks. KPMG’s Central Bank network professionals prepared and delivered country-specific training, covering necessary reforms, risk management and regulatory reports. Through a mix of classroom and breakaway sessions, the participants helped to provide far greater confidence in the banks’ ability to meet the new standards.

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© 2017 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. Overseeing 7 payment systems A national economy could be severely damaged if key processes, such as money issuance and central payments systems, fail to run smoothly.

Payments form the heart of the The flurry of new payment systems on their payments systems, with banking industry and contribute to an is taxing the abilities of even the expertise in people and processes and, efficient means of exchanging goods most sophisticated central bankers, crucially, the ability to come up with and services. Any weaknesses can who must keep on top of a continual sound technical solutions. With a strong impact the stability of the national pipeline of innovations, such as mobile track record in delivering real-time gross economy and reduce confidence in phone-based payments (e.g. M-Pesa), settlement (RTGS) systems solutions, the overall financial system. A range peer-to-peer lending (e.g. Zopa) and the KPMG Central Bank network can of stakeholders are involved, including digital currencies (e.g. Bitcoin). help clients with: retail banks, major corporations and payment schemes. Strategic retail and How KPMG’s Central Bank —— strategic advice and support, as well wholesale payment infrastructures must network can help as business process reengineering adhere to recognized standards, with and information technology (IT) payments increasingly made in real- The KPMG Central Bank network has solutions for new payment systems time. In addition to the national payment worked across global, regional and local network, some central banks also markets to develop an understanding —— workshops and training on payment oversee commercial banks’ payment of the complexity of the payments systems. systems, although the level of oversight industry. KPMG’s Central Bank network varies from country to country. has advised a number of central banks Case study

A new era in payments

KPMG in the UK supported the UK banking industry through the successful launch of the UK Faster Payments Service, putting it at the forefront of the world’s financial sectors. The biggest payments change in over 2 decades involved a huge, industry-wide exercise requiring complex changes to the banks’ systems. Professionals from KPMG’s Central Bank network were contracted by the Association for Payments Clearing Services (APACS) and worked with 13 major banks, an infrastructure provider and payments scheme operator — with the Bank of England as an important stakeholder. The KPMG Central Bank network professionals brought transparency, clarity and discipline to the program, coordinating essential industry testing of end-to-end payments and ensuring participants were ready to process the high volumes of payments expected to go through the system. Their efforts made a significant impact in meeting the regulatory deadline.

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© 2017 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. Implementing International Financial Reporting 8 Standards (IFRS) The harmonization of financial reporting across the globe is already a reality for most countries — following or converging to International Financial Reporting Standards (IFRS).

The convergence of central banks How KPMG’s Central Bank and regulations as well as with has been much slower, as illustrated network can help reporting requirements to other in the accompanying diagrams. The organizations (such as the IMF) primary reason is that IFRS have been KPMG’s Central Bank network developed with the main objective of specialists have extensive experience —— benchmark with peers on accounting responding to the necessities of capital in assisting central banks world-wide in practices, reporting models and markets and investors. This does not transitioning to IFRS. KPMG’s Central finance function perfectly match the requirements of Bank network professionals have a —— development of accounting manuals central banks, due to some specific unique blend of skills and long-standing and procedures related to the reporting challenges of IFRS such as: experience in IFRS, the Eurosystem preparation of financial statements Accounting Guidelines and other and disclosures —— Technical accounting issues: recognized standards. Our experience —— foreign exchange revaluation enables us to recommend solutions —— transforming and optimizing the for virtually any challenges that an finance function —— unrealized gains/losses and fair IFRS conversion project may bring value measurement to a central bank. —— adjustment to accounting systems in order to bring them to compliance —— gold accounting and reporting An IFRS conversion project with IFRS —— cost of production of banknotes encompasses several components and perspectives: —— extensive training programs and issue of banknotes delivered to the finance department —— special economic/financial —— diagnostic and assessment of of central banks. assistance programs IFRS transition impacts and recommendations on potential KPMG’s Central Bank network —— provisions and pension liabilities. measures to mitigate significant and professionals have collaborated —— Disclosures requirements, namely: unwanted effects with central banks across the world in IFRS matters: —— IFRS 7 and cash flow statements —— solve specific technical challenges related to complex transactions and —— Bank of Portugal —— significant management specific issues that affect central estimates and uncertainties —— Central Bank of Kosovo banks —— related party disclosures. —— Nacional Bank of Angola —— IFRS 9 may have a massive impact —— Consistency with the central bank on the financial positions and —— Central Bank of Nigeria law and distribution of realized/ statements of performance of —— Bank of Mozambique unrealized gains central banks — the adoption of IFRS 9 requires detailed assessment of —— Central Bank of Banco Cape Verde —— Independence of the central bank financial, operational and market —— Central Bank of São Tomé e impacts Príncipe —— recommendations to help ensure —— Nepal Rastra Bank compliance with central bank laws

16 Creating a world-class central bank

IFRS or IFRS-based ECB or BCEAO Different from IFRS

IFRS conversion by banks, insurers and corporates

IFRS or IFRS-based Converging to IFRS Different from IFRS Creating a world-class central bank 17

© 2017 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. Cyber security and digital 9 disruption implications How digital disruption in financial services is changing the cyber- security posture of central banks.

Like all organizations, central banks commercial service providers to enhance How KPMG’s Central Bank are heavily reliant upon technology operational efficiency and effectiveness. network can help for operational continuity. A reliable, These relationships often require the uninterrupted process gives the exchange of sensitive information KPMG’s Central Bank network can central bank, the government, financial and connection to external systems assist by developing a clear digital market counter-parties and the wider that introduce an assortment of risks. strategy that fully supports central population confidence that transactions An external party’s failure to restrict banks’ objectives and which places (increasingly in real time) will proceed access to its IT environment could a greater focus on the economic smoothly. Those central banks that render connected central bank systems and business impact of technology. oversee commercial banks’ payment vulnerable to intruders. With organizational continuity as a systems need to have the necessary key objective, the main risks facing Several initiatives have started to skills and IT and reporting structures in organizations are addressed. As demonstrate commitment to cyber- place to identify systemic risks. trusted advisors to governments and security risk management and to provide industry around the world, the KPMG The risks are increasing, with new threats ways to reduce central banks exposures. Central Bank network helps to find and attacks targeting several banks For example, The Bank for International creative and forward-thinking ways to worldwide in recent times. An increase in Settlements (BIS) has carried out address cyber security and enhance the adoption of technology, together with important initial work in this area over the internal controls during the digital new structures and processes, has been past 2 years. The European Central Bank transformation. This includes: a challenge for all central banks and they has recently started to collect information need to establish additional methods to from 18 of the Eurozone’s biggest banks, —— establishing digital and technology identify and protect themselves against which will be obliged to inform regulators strategies cyber threats and to detect, respond to of ‘significant’ cyber attacks, the main and recover operations during or after objective being to identify trends and —— project management, vendor cyber-security incidents. to inform banks of possible impending selection and system testing events. Organizations can no longer rely —— carrying out business process on traditional techniques to protect Given the highly sensitive nature of reengineering and recommending themselves adequately against new central banks, any kind of negative new IT infrastructure and threats because the attackers know incident could attract unwelcome publicity applications for existing and new what works. There are state and non- and undermine trust and confidence. payment systems state actors present who possess Therefore, management will be keen to significant resources to create complex develop strong defenses against external —— assessing and developing strategies attacks which are neither easy to threats. The KPMG Central Bank network to mitigate external party risk detect nor contain. The sophistication has assisted central banks in developing —— carrying out digital risk assessments of attacks is increasing, along with the a preventative approach to protect the including full cyber security expectations of counter-parties, the digital environment. With improved threat transformation assistance general public, management and data detection, security analytics and response protection requirements. capabilities in all digital initiatives, banks —— evaluating and improving controls can better identify, investigate and over insider trading, money Central banks work closely with respond to incidents in order to limit and laundering and procurement. commercial banks and other financial reduce the impact of undesired events. institutions and engage outsourced

18 Creating a world-class central bank

Transforming core banking services Over 3 years, a team of professionals from the KPMG Central Bank network worked closely with the central bank in one of the largest developing economies to produce a step change in efficiency, improving transaction processing, introducing real-time reporting, internet banking for customers and automated settlements and enhancing liquidity management processes. The team led the business process reengineering, helped with tenders and subsequent vendor evaluation, contracts and service level agreements and project managed the transition. The client now provides a far more effective core banking service to its stakeholders, with better funds flow. A step change in IT performance Through an understanding of the unique challenges of IT in central banking, along with the KPMG Central Bank network’s commercial banking experience, the KPMG Central Bank network team was able to help a major European central bank with a wide range of important programs. The KPMG Central Bank network team worked on IT strategy (including infrastructure architecture), IT management (such as process optimization and IT compliance) and systems design. The central bank now has a far more comprehensive reporting and analysis capability and greater confidence in managing the monetary infrastructure, with higher levels of resilience, continuity and security. Providing cyber-security assessments KPMG in Qatar was selected by the central bank of Qatar to conduct a cyber security maturity assessment (CMA) across the banking sector. Working with the support of KPMG in India, the KPMG Central Bank network team worked closely with the Qatar Central Bank to design a framework for the assessment that comprised leading cyber security standards. All banks were individually assessed across various parameters and each bank was then provided with a view on their CMA and a holistic view across the banking sector was provided to the central bank with recommendations and a roadmap. Providing cyber-security transformation KPMG in Brazil has been working together with complex clearing organizations, helping clients transition from a reactive to the proactive operating mode required for transformative change. The KPMG Central Bank network team assists clients to manage technological and system vulnerabilities and to address the core people processes, culture and behaviors related to the cyber security posture needed to properly manage cyber threats and risks. By bringing together specialists in information protection and business continuity, risk management, organizational design and digital, KPMG’s Central Bank network team tailors strategies relevant to our clients. Using their extensive experience, they were able to design, structure and implement programs that deliver sustainable benefits. Benchmarking the central bank’s cyber security Cyber risks are a top priority for many central banks, not only due to the criticality of central bank systems and the high confidentiality of their information, but also due to the rapid rate of evolution of new cyber weapons. One of the world’s major central banks engaged a team from the KPMG Central Bank network to review and benchmark its processes and controls to manage cyber risks. The results showed the board that the bank was indeed up to the extremely high standard expected of a central bank, but also provided some recommendations to further optimize the internal controls and processes.

Creating a world-class central bank 19

© 2017 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. Effective financial oversight — accountability 10 and transparency A robust corporate reporting process is the foundation for effective financial oversight, accountability and transparency.

It is good practice to publish promptly How KPMG’s Central Bank —— transforming the processes audited financial statements even if a network can help and organization of the finance central bank is not legally obliged to, as function it provides a level of accountability and KPMG’s Central Bank network transparency that is consistent with its professionals have extensive —— integrating risk and accounting public interest mandate. experience in performing independent processes financial statement audits and in An independent external audit adds —— preparing financial information for providing and other assurance credibility to the financial statements internal and/or external purposes. services to central banks around the of a central bank, but the board world. It is important to note that the nature and remains primarily responsible for those extent of non-assurance services that financial statements. The board may Other assurance services include may be provided by the external auditors establish an audit committee to assist reporting on: are subject to national and international in discharging this responsibility and, ethical requirements and consideration when it does, the work of an audit —— compliance with rules and by the audit committee. committee should include: regulations, such as rules on insider information, anti-money laundering KPMG’s Central Bank network —— evaluating the adequacy of regulations and minimum standards currently audits many central banks the finance function, the for risk management in the world’s largest economies appropriateness of the financial and has extensive experience in reporting framework and significant —— accounting for costs and the use of high growth markets. KPMG’s financial reporting issues funds Central Bank network external audit clients include: —— assessing management’s judgments, —— proper functioning of information including its choice of accounting systems. —— The Federal Reserve Bank System policies and estimates KPMG Central Bank network —— assessing the completeness, professionals also have significant —— Deutsche Bundesbank clarity and transparency of financial experience in providing non- assurance statements. services: —— Bank of England Quite apart from the external audit —— Accounting advisory services include —— Banque de France report, central banks may also be assistance with: required to provide other types of —— Reserve Bank of Australia —— adopting the IFRS framework external reports to stakeholders or —— Banco de España internal reports to the board, where —— implementing new financial accountability and transparency is reporting requirements —— Swiss National Bank enhanced by obtaining independent assurance on the contents of the report. —— accounting for complex —— National Bank of Austria transactions. —— Central Bank of the United Arab —— Finance/accounting services include Emirates assistance with: —— Bank of Greece

—— Qatar Central Bank

20 Creating a world-class central bank

KPMG’s Global Central Bank network major financial market players, regulators KPMG’s Regulatory Centers of brings together knowledge and and leading industry bodies. Excellence help drive and shape experience from its specialists around the latest regulatory developments the world to help central banks deal KPMG Central Bank network and provide cutting-edge advice and with their unique challenges. specialists engage closely with central support in supervising compliance. banks around the world, advising them For central banks in fast growing The KPMG Central Bank network has and providing input on key strategic economies, our Financial Services a wealth of industry experience and challenges. In addition, the practice’s High Growth Markets Network specialist knowledge, tapping into a steering group regularly considers champions new innovations and global network of audit, tax and advisory emerging issues and studies central coaches and challenges financial services. KPMG’s Central Bank network bank accounting practices through institutions and their regulators on has worked with central banks in mature benchmarking studies and other strategies and operations. and emerging economies and has thought leadership publications. close relationships with many of the Additional KPMG publications

Creating a world class central bank Peer analysis: predicting supervisory December 2016 challenges May 2016

Evolving banking regulation part five Governance of central banks February 2016 February 2015

Creating a world class central bank Current trends in central bank financial May 2014 reporting practices October 2012

Central bank accountability and transparency October 2009

Creating a world-class central bank 21

Global Co-Chairman Financial Global Co-Chairman Financial Acting Head of Global Banking & Services Services Capital Markets Jeremy Anderson Jim Liddy Judd Caplain T: +44 20 7311 5800 T: +1 212 909 5583 T: +1 212 872 6802 E: [email protected] E: [email protected] E: [email protected]

KPMG’s Central Bank network Chair Ricardo Anhesini Sheldon Gunn Pietro Di Fluri KPMG in Brazil KPMG in Canada KPMG in Switzerland T: +55 11 2183 3141 T: +1 613 212 2893 T: +41582494193 E: [email protected] E: [email protected] E: [email protected]

Lead Specialist Peter Russell James Loh KPMG in Australia KPMG in Singapore David Schickner T: +61 29 335 7731 T: +6564118933 KPMG in Germany E: [email protected] E: [email protected] T: +49 69 9587 2675 E: [email protected] Pascal Brouard Venkataramanan Vishwanath KPMG in France KPMG in India Mark McFaddin T: +33155686996 T: +912239896000 KPMG in the US E: [email protected] E: [email protected] T: +1 703 286 8725 E: [email protected] Michelle Hinchliffe Yael Selfin KPMG in the UK KPMG in the UK Zdenek Tuma T: +44 20 73113513 T: +44 207 3112074 KPMG in CEE Region E: [email protected] E: [email protected] T: +420222123390 E: [email protected] Vanessa Yuill Network Coordinator KPMG in South Africa Omar Mahmood Gayatri Devi T: +27 11 647 8339 KPMG in Middle East Region KPMG Global Financial Services E: [email protected] T: +974 44576513 T: +44 207 3115365 E: [email protected] E: [email protected]

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The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Designed by Evalueserve. Publication name: Creating a world-class central bank Publication number: 134658-G Publication date: August 2017