Creating a leading central bank

Leading a central bank has never been easy. Yet, today, central banks are being asked to operate in an unsettled environment, often using outdated tools and without the resources and capabilities they need to succeed.

The impact of the COVID-19 pandemic is still being felt across the world. Geopolitical tensions warp the environment. Inflation is rising. Monetary and fiscal policies are falling out of alignment. At a global level, countries are competing on energy security, technology innovation and economic policies while trust in traditional institutions is being eroded.

In addition to this, a fierce competition for talent continues to support two big changes impacting the industry:

Digitization and automation: Central banks recognize the need to modernize their operations through technology and operational transformation. Never has the pace and volume of changes that central banks face been so critical and, consequently, the pressure that such a scenario imposes to the financial systems infrastructure so demanding.

Environmental, Social and Governance (ESG): Central banks also know they have a key role to play in driving the transition to a green, equitable and just economy. Both trends must be front of mind for central bankers as they move to execute their agendas.

In this report, the KPMG Central Bank network explore key priorities for central banks as they navigate the challenges sweeping across the industry. The team dive into the battle for talent, the development of Central Bank Digital Currencies, the rise of the ESG agenda and the evolution of cyber security, while shining a spotlight on underlying themes such as accounting standardization and internal audit modernization. We also include practical advice from KPMG professionals on topics like operational transformation and the value of supervisory technologies (SupTech).

Central banks and financial supervisors have an important role to create appropriate prudential regulation, policies and rules to ensure the orderly transition to a green financial system. At the same time, they should take action to green their own assets and infrastructure to ensure that they themselves are positive contributors to the drive to Net Zero.

As the guardian of the monetary system, central banks are very aware of the risk and impact of a cyber-attack. An attack on a large bank or asset manager could destabilize the system. A successful attack on the financial market infrastructure or on the central bank itself could destabilize the entire country. Central banks should be focusing on integrating cyber resilience within the decision-making process across all business units, supported by a well-defined risk management process.

Central banks can no longer afford to stand on the sidelines as private digital currencies parallel financial circuits around the world. Central banks needed move quickly and they recognize that a Central Bank Digital Currency (CBDC) should be part of the solution. 

The market has changed and central banks know they need to transform to stay relevant. Transforming a central bank is a monumental task. Operational transformation can be difficult for any organization but for central banks, the challenges are often much more complex, unique and nuanced.

The IFRS accounting standards were not created with central banks in mind. Yet central banks still need to account for their financial positions. They are responsible for massive amounts of public funds, play a significant role in the economy and oversee the stability of the financial system.

The impact on HR and talent functions has been significant. The rapid digitization experienced through the pandemic created entirely new ways of working. For central banks, the challenges are perhaps even greater. The reality is that the pool of experienced central bank employees is fairly small, particularly when you start getting into the niche job descriptions related to monetary policy or regulation. Central banks tend to experience a lower turn rate and they hold great appeal to employees driven by a greater purpose.

The SupTech market is booming. And the different types of technologies now available to supervisory authorities has grown exponentially in the past few years. Banking supervisors know they need to change; The banks they oversee are going more and more digital and are now playing in new channels, new tools and new products. That means a greater need for oversight and, as a result, that means more data and more reporting.

Central banks want to play in digital currencies. They want to share real-time data with their stakeholders. They want to innovate and automate their processes. And they want their people to focus on more strategic, value-adding activities. They know none of that is possible on old mainframes or in private clouds.

Central banks are hugely complex and massively diversified organizations. Depending on their mandate, they may be responsible for banknotes and currency, banking supervision, financial stability or even the collection of statistics. They require all the usual back-office functionality found at any commercial bank or in government departments. And internal audit's job is to provide independent assurance over it all.

Central bank fraud events can be big, public and messy. Central banks should have a high level of confidence in compliance with the seven elements outlined in the CPMI strategy. Those not in compliance don’t just run the risk of failing an audit by the BIS, they also are at higher risk of experiencing a fraudulent event.

What makes the topics and insights from this report particularly valuable, is that they are based on hands-on experience gained from central banks and supervisory authorities around the world. The KPMG Central Bank network brings together knowledge and experience from specialists who works with central banks around the world, advising them and providing strategic input on tackling their unique challenges. KPMG’s Regulatory Center of Excellence also helps to drive and shape the latest regulatory developments and provide cutting-edge advice and support in supervising compliance.