Financing risk can be divided into refinancing risk and liquidity risk. The former is generally measured by the amount of required refinancing, for example, during a year. However, financing risks are also affected by other factors, especially the need to ensure adequate and diverse sources of funding. The latter refers to the risk associated the central government short-term financing needs compared to its liquid cash funds and funding capability.
The State Treasury manages refinancing risk first and foremost by avoiding large maturity concentrations of debt subject to limits by Ministry of Finance. Refinancing risk can also be alleviated by diversifying funding in different instruments, investor types and geographic areas. This reduces the risk associated with an individual source of funding and improves the liquidity and attractiveness of government bonds to investors.
The State Treasury manages liquidity risk by keeping a sufficient cash buffer. This buffer will be larger if uncertainty related to the availability of funding is perceived to rise. For example, during the Covid-19 outbreak, the size of the cash buffer grew considerably. Liquidity can typically be added quickly with short-term funding.
Liquidity risk management is based on the central government cash flow forecast system. In practise, the cash reserves are invested in collateralised or low-risk short-term maturities using primarily bank and central bank deposits. For the time being, the State Treasury can also make short-term deposits in the Bank of Finland.