and will of the ecb to make an independent credit assessment. the connection between credit and liquidity risk while i have emphasised so far credit risk management, i would also like to touch upon the more elusive concept of liquidity risk. the current financial crisis has been triggered by the inability of some financial institutions to fund some complex assets. it has been traditionally thought that while such a situation may put the institution at strain, it should be clearly distinguished from that of an insolvency. however, the experience of the last three years has showed that the distinction is far from simple. a prolonged period of liquidity difficulties may easily leave no other choice to the institution than an emergency sale of assets at significant losses and a subsequent depletion of its capital position. therefore a liquidity problem, if it cannot be properly addressed – possibly by the intervention of the central bank - can easily lead to insolvency. in recognising the importance of liquidity risk and the systemic implications of a liquidity crisis, the basel committee issued a consultative document on an international framework for liquidity risk management, standards and monitoring in december 2010. the document put forward two liquidity risk standards and a set of tools for ongoing monitoring of liquidity risk exposures and information exchange among supervisors. the two standards, namely ( i ) a global minimum “ liquidity coverage ratio ” which aims at capturing liquidity risk in the short term by ensuring that banks hold sufficient high quality liquid assets to withstand an acute stress lasting one month ; and ( ii ) the longer term “ net stable funding ratio ” which aims at incentivising banks to fund themselves using more stable sources on a structural basis by establishing a minimum acceptable amount of stable funding based on the liquidity characteristics of the financial institution ’ s assets and activities over a one year time horizon. a discussion has been triggered and various concerns were voiced on the calibration of the standards, which in the view of some could generate significant negative repercussions for the real economy, for certain markets ( such as the money market and interbank market ) and for the business models of some banks. central in this discussion is the question on the set of assets considered eligible for the short - term liquidity standard. it has been claimed that the proposal is not in line with the severe stress scenario that is assumed and that it could lead to concentration risk as well as higher cost for the assets that are not included. furthermore, the design of the longer

jose manuel gonzalez - paramo : the challenges of credit risk management – lessons learned from the crisis speech by mr jose manuel gonzalez - paramo, member of the executive board of the european central bank, at risk europe 2010, frankfurt am main, 26 may 2010. * * * ladies and gentlemen, it is a great pleasure for me to address again this year, for the second time in a row, the annual risk europe conference here in frankfurt. i would have liked to say that this simply shows the great importance that the ecb places in the development of sound and effective risk management practices in the financial industry. however, i must admit that my eagerness to address this forum is also a result of the great challenges that we, central banks and private financial institutions alike, continue to face collectively in managing risk. these challenges seem to persist, although they have been changing face. the high levels of uncertainty manifested in unprecedented levels of asset volatility in the years 2007 - 2009 emanated originally from liquidity shortages in the off - balance sheet management of highly complex assets. in late 2009 and 2010 we have seen again high levels of volatility, this time associated with concerns about the large fiscal imbalances in some eu member states. in both phases of the crisis, financial markets have reacted to the increasing fear that some market participants may fail to honour their obligations ; they have in other words experienced an increase in credit risk. under the general concept of credit risk i would include both the risk of default of issuers of securities held in portfolios as well the counterparty risk faced in over - the - counter transactions. today i would like to share with you some thoughts on the management of such risks in general and in central banks in particular. general principles in the management of credit risk it is widely accepted ( but not appropriately emphasised ) that one of the causes of the deep financial crisis witnessed since mid 2007 has been the deviation from well established principles in the management of risk ( in particular credit risk ) by financial institutions. common sense risk management practices such as “ know your counterparties ”, “ invest only in products you understand ”, “ do not outsource credit risk management by relying exclusively on external credit assessments ”, “ do not rely exclusively on quantitative models, however sophisticated ” had been abandoned. it is interesting to recall at this stage the work of the original counterparty risk management policy group 1 co - chaired by e. gerald corrigan and stephen g. thie