Otherwise the central bank will be unable to keep its promise. Throughout history, central banks have tried various mechanisms for tying themselves to the mast. Being accountable for their promises in the form reporting and follow-up is one mechanism that ensures that the bank is tied to the mast. Relinquishing the opportunity to break a promise makes that promise more credible. These are matters I touched on in my speech “On the topic of keeping promises” in 2008. Keeping a promise is difficult, because reneging on a promise will often be the tempting or rational choice in the short-term. The legal scholar and economist Michael Woodford has pointed out that in order to keep your word it is not enough to make a promise today and keep your word tomorrow. When making interest rate forecasts, we must also take into consideration the promises made yesterday. Only then can we fully use expectations to stabilise the economy optimally. This is referred to as monetary policy from a timeless perspective (Michael Woodford, 2003: Interest and Prices, Princeton University Press). Today there is general consensus that price stability is [not only] the best contribution that monetary policy can make to economic stability over time, [but perhaps also the only promise the central bank can actually deliver]. In the long term, a stable value of money is the only promise that the central bank has the means to deliver. This promise was previously kept by regulating the supply of money issued. Today, the interest rate is the instrument.
Management of specific, more common or day-to-day operational risks is not a new practice; it has always been important for banks to prevent fraud, maintain the integrity of internal controls and reduce errors in data transaction processing, ensuring the availability of information technology infrastructure and their back up systems when needed. More often than not, operational risks are taken as given and very little attention has been paid to it. Operational risk is intrinsic to financial institutions and it should be an important component of their firm-wide risk management systems. However, operational risk is harder to quantify and model than market and credit risks. Operational risk differs from other banking risks. It is a risk that is not willfully incurred in return for an expected reward but is implicit in the ordinary course of banking business and has the potential to affect the risk management process. However, ignorance of operational risks or failure to properly manage such risk can result in a misstatement of an institution's risk profile and expose the institution to significant losses. Such institutions can become a regulatory burden. These and a few other factors have led the Basel Committee to recommend a separate capital for operational risk. 3. Definition of operational risk has evolved rapidly over the past few years. First, it was commonly defined as every type of unquantifiable risk faced by a bank, which has been refined considerably to include modern day risks.