In addition, the euro area addressed risks in banks’ balance sheets with an unprecedented project in 2014 – the comprehensive assessment. Not only did that exercise lead to a common definition of non-performing loans for the first time, it also led to a significant increase in provisioning. Altogether, the banking system is much more resilient today than it was in 2008 – not least thanks to an improved regulatory and supervisory framework. Still, in more general terms, we cannot deny the existence of risks. This is particularly true for the financial market, whose core function is to allocate risks. Each and every financial institution must therefore cope with risks. Alas, this is more difficult than it sounds. BIS central bankers’ speeches  1  Acknowledging risks – there is no such thing as a free lunch For a start, there are those risks that cannot be foreseen, the famous black swans. Such risks cannot be managed in any meaningful way. In fact, the only option is to increase resilience. For banks, the universal buffer against all kinds of unexpected shocks is capital. And, on the capital front, much has been done over the past few years. As I already mentioned, banks around the world have increased their capital ratios since 2008. In terms of capital, banks in Europe are therefore much better prepared for those risks that cannot yet be foreseen. But then there are those risks that can be foreseen – they can be measured and managed.
It is these risks that are particularly relevant for risk management in banks, following an economic dictum that has been attributed to several people over the years, including an author of science fiction novels and an American General. The general was Leonard Porter Ayres, who also worked as a statistician and economist. When asked by a group of reporters to impart some words of wisdom gathered from his long years of economic study, Ayres replied: “It is an immutable economic fact that there is no such thing as a free lunch.” I am pretty sure that everyone in this room has used that phrase at least once. Translated into the language of finance, it reads: whoever wants to make a profit has to take a risk. The returns, however, are mostly generated right away, whereas the risk might only materialise in the future. This is where good risk management comes into play. Banks and the entire banking system have indeed become much more resilient to shocks. Nevertheless, good risk management is still necessary. It should enrich decision-making by providing a medium and long-term view, and it should highlight the downside to every upside. In a way, risk managers have to be the spoilsports. The same is, of course, true for banking supervisors. One of the tasks of banking supervisors is to ask questions when things are going well, and to intervene when they are not. Therefore, risk managers, as well as banking supervisors, explicitly advocate a forwardlooking, risk-based approach.