However, you would be mistaken in assuming that managing financial risks has no role in the Eurosystem’s monetary policy implementation – especially in the light of the significant balance sheet expansion over the past few years. On the contrary, we have applied the guiding principles of our financial risk management framework in a stable manner. We established these principles long before we embarked on non-conventional policies, not least because we have a statutory obligation to lend only against adequate collateral. We continue to apply them to standard as well as non-standard policy measures. Broadly speaking, these principles are protection, consistency, simplicity and transparency. This means that – if multiple monetary policy options exist to fulfil our mandate – we should select the measures that minimise our own exposure to financial risks. This idea is sometimes referred to as risk efficiency. These principles also imply that we aim to avoid undue distortions in the markets in which we operate. We trade at market prices and we adopt a risk-equivalent approach in setting our risk control measures. In addition, the principles require risk management to be an integral part of decision-making in the institution. So we are compelled to measure risk in an objective and consistent way across different types of operation. Lastly, our frameworks promote transparency and simplicity, and we champion adherence to these principles by being rules-based ourselves and as predictable as possible in our operations. We have come together here to discuss risk management for central banks and the lessons from the crisis.
It is important for central banks to strike the right balance in this regard, and for financial risks to be correctly measured, properly understood and sufficiently contained. Moreover, the European Court of Justice, in its judgment on outright monetary transactions, has confirmed the need to provide sufficient risk management measures that are “likely to reduce the risk of losses to which the ECB is exposed”. Speaking in a country with a proud history of maritime exploration let me recall the words of Seneca, the Younger: When a man does not know what harbour he is making for, no wind is the right wind. The “harbour” of a central bank is its mandate. The principles it seeks to adhere to are the “compass” that helps it fulfil this mandate. When a central bank is facing a crisis, it needs to consider whether its monetary policy operations are still proportionate. This need stems from the obligation under primary law (proportionality principle) to properly weigh up all the components of a given measure against one another. The aim is to determine whether the expected benefits of the measure outweigh its costs. As a general rule, a stable risk management approach and a through-the-cycle approach are advisable. However, extraordinary circumstances may require extensions of the framework, such as the acceptance of additional collateral. If this still proves insufficient, unprecedented types of monetary policy measures may call for entirely new operations, accompanied by new risk management measures.