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

this leads to a voluntary allegiance of the countries of europe, initiated by a number of great europeans, amongst whom carlo ciampi, who - in my mind - has also shown that central bankers can become visionary politicians ; but then carlo ciampi was not an ordinary central banker, but already a visionary in his days as governor of the banca d ’ italia. carlo ciampi and many others were convinced that europe could only prosper in unity. for the first time in the history of europe, nation states voluntarily decided to transfer part of their sovereignty to a ‘ higher ’ collective body, nowadays referred to as the european union. in this respect, rome is also a symbolic place for the governing council to meet, as the first treaty, establishing the european economic community, was concluded here - 45 years ago - and hence bears its name. finally, this meeting of the governing council takes place in a nation that belongs to the foundingcountries of the european community, and which has always been among the staunchest supporters of the european integration process, as a road towards peace and prosperity. admittedly, when the so - called maastricht treaty was concluded - in 1992 - the expectation was that only a small group of european countries would be in the position to adopt the euro. for some, this small group would not include italy. looking back, the convergence process that was triggered, after the ratification of the maastricht treaty, was very impressive, in particular in italy, eventually paving the way for this country to be among the first to adopt the euro. this convergence process has also contributed greatly to macro - economic stability and sound economic policies, both in this and in other european countries, a practice nowadays entrenched in the treaty, in particular in the so - called stability and growth pact. where many did not have considered this to be possible, italy has thus become a member of the stability - oriented family of european nations. also in this respect, it is a pleasure for the governing council to meet here. we are living in a period in which history is made, almost every day. in two weeks time, ten countries will sign the so - called accession treaties, making it possible for these countries to become a member of the european union, in the spring of next year. this enlargement of the european union to the east and south of our continent is another historical event, ending the rift that was created after the second world war. the benefits of