banks. what is special about central banks? as policy institutions, central banks have objectives and responsibilities that differ from the financial institutions operating on a commercial basis. to enable the central banks to fulfil their responsibilities, they also have special powers – especially the monopoly of issuing currency and 1 / 7 bis central bankers'speeches reserve money. we should resist the temptation to use the special characteristics of central banks as excuses for not having to implement the best risk management techniques developed elsewhere. the risk management standard and techniques of " ordinary " banks should serve as an obvious starting point when discussing risks. there are differences, but they have to be justified in each case. how do the risks come about? central banks take on balance sheet risks as a result of their investment activities ( as in holding foreign reserves ), their monetary policy operations, and from time to time as providers of lender of last resort credit to their counterparts. as investors, central banks have traditionally been conservative. this means that when faced with trade - offs between risk and return, central banks have traditionally tended to favour assets with very low credit risk even if the expected returns from such investments have been modest. traditionally, central banks have also preferred very liquid, short - term investments. these choices have been clearly visible in the way foreign exchange reserves are usually invested. as policy makers, central banks influence market conditions and market prices in a unique way. this is the task why central banks exist today, and why they are able to conduct monetary policy. the ability, and indeed the obligation, to steer the money markets in order to deliver macroeconomic stability adds an important extra twist to the risk management problem : the central bank is not just price taker in the financial markets, it is a price maker too. this is one of the features that make them special as investors and lenders. one may see it as a sort of paradox that central banks, in making policy, themselves seem to create and control much of the risk they themselves bear as investors and creditors. however, the central banks do not actually have arbitrary powers to steer the interest rates or other market prices. they are mandated to exercise their monetary policy powers to pursue specific pre - set goals : the policy objectives for which they are accountable. in the eurosystem for instance, price stability is the overriding objective. therefore, although the actions of the central banks may have an impact on their financial risks, these actions are taken with the requirements of monetary ( and financial ) policy in view

##ot explained the bill market of his time could be pacified. organizational aspects turning to the organizational aspects of risk management, we find both similarities and differences between central banks and other financial institutions. 3 / 7 bis central bankers'speeches starting with the similarities, a generally accepted principle that applies to both is that risk control functions and risk - taking functions should be separated. as a rule, this separation should reach the top decision - making level of the organization. the different business and reporting lines, both those that take risk on behalf of the bank and those that assess and control it, present their views directly to the decision - making level. after the financial crisis, and the unpleasant surprises which were uncovered in a number of investment and retail banks, the value of following this principle has been understood even more clearly than before. the top management must be responsible for ensuring and overseeing a strong risk governance framework, and must be able to carry this responsibility. this requires a systematic approach. it includes a strong risk culture, a well - developed and explicit policy regarding to risk taking and risk management, up - to - date methodologies for measuring financial risks, and well - defined responsibilities for risk management and control functions. an effective risk control function is a key component in the organization. this function is responsible for overseeing risk - taking activities across the institution. the important thing is that it should have the authority it needs. the risk control function should be independent, with sufficient stature, resources and direct access to the board. risk reporting to the board requires careful design in order to convey bank - wide, individual portfolio and other risks in a concise and meaningful manner. reporting should accurately communicate risk exposures and results of stress tests or scenario analyses and should provoke a robust discussion of, for example, the bank's current and prospective exposures ( particularly under stressed scenarios ). a balance should be found between the independence of the risk control function, on the one hand, and smooth horizontal information flows on the other. as emphasized in bis principles for risk management, for example, banks should avoid organizational " silos " that can impede effective sharing of information across the organization. necessary cooperation between the functions should of course never compromise the special independent role of the risk control function. in " ordinary ", for - profit institutions, the main organizational challenge is to reconcile the business orientation of the revenue - generating functions with the caution guarded by the risk controlling function. this balance has to be managed at a high, responsible decision -