recognised, some concerns have been voiced that central banks have taken on too many risks in their balance sheets. the point that i wanted to make today is that taking on more risk in times of distress is inherent in the financial stability function of central banks. the central bank is the only patient investors who can intervene at times of crisis as a counterpart to distressed short term investors with a view to ensuring market liquidity and restoring confidence. however, this can happen only if the financial independence of the central bank is safeguarded, otherwise the credibility of its monetary policy aimed at ensuring price stability may be jeopardised. this is why central banks manage their risks, albeit not necessarily in the same way as private financial institutions because of the fundamental differences which exist between the two. hopefully these differences are now better understood, and misperceptions about the role of central banks corrected. thank you for your attention. see, for instance, h. - w. sinn, 1 june 2011, “ the ecb stealth bailout ”, vox. see, for instance, buiter, w., e. rahbari and j. michels, 9 june 2011, “ targeting the wrong villain : target2 and intra - eurosystem imbalances in credit flows ”, citigroup global economics view ; k. whelan, 7 june 2011, “ professor sinn misses the target. ” bis central bankers ’ speeches

funds it has lent. a substantial fraction of value can be recovered from the repo - ed assets. what matters most, repo operations are short - term lending, from one week up to, currently, three months. the short - term nature of these interventions means that they can be – and are being – elastically unwound as market conditions improve. in this respect, the ecb framework allows for an “ automatic ” contraction in its balance sheet : when favourable conditions are restored, banks can once again lend to each other in the money market. it goes of course without saying that not every action to deal with systemic or banking crises needs to be taken by the central bank. liquidity support by central banks is meant to provide counterparties with bridge funding to cover the transition to calmer market conditions. it is predicated on the assumption that counterparties are and remain solvent institutions. if the latter condition is not met, then fiscal authorities should step in and, if necessary, inject fresh capital. the measures announced for the irish banking system are a case in point. in the following i will elaborate in greater detail on the key aspects that enable central banks to take risks in crises. in particular, i will describe some features of risk management in central banks, explaining the main differences with risk management practices in private banks. i will also briefly describe the risk control framework of the ecb, and the eurosystem in general, which ensures its financial protection while helping to achieve its policy goal. 2. risk management in a central bank general remarks central banks have preferences and constraints that differ from those of private banks. the objectives of central banks are defined in their statutes, which typically specify the maintenance of price stability as their primary mandate. for central banking policies to be successful, they need to remain credible by making sure that at least two conditions are met. bis central bankers ’ speeches first, a central bank should be sufficiently capitalised and run in such a way that it remains financially independent. financial independence helps to keep external parties from unduly interfering in the conduct of monetary policy. second, the long - term profitability of a central bank needs to be ensured, so that the bank ’ s reaction to specific economic circumstances is not influenced by considerations of the short - term financial impact of such policies on its profit and loss accounts. consequently, the capital position of a central bank, its profitability and the degree of financial risk protection provided by its risk control framework seem to be crucial