gabriel makhlouf : opening remarks to the international operational risk working group opening remarks by mr gabriel makhlouf, governor of the central bank of ireland, to the international operational risk working group, virtual conference hosted by the central bank of ireland, 18 may 2021. * * * welcome to dublin and the central bank of ireland. over the past decade, we have been witnessing significant changes to the risks our respective institutions confront. in many cases our mandates have expanded since the global financial crisis, complicated by the need to effectively process and analyse big data, often now at higher frequency intervals, and compounded by the phased migration from legacy to new technologies. the cyber and information security risks are evolving, and hybrid threats can arise as these overlay with physical security and data protection risks. in his book, against the gods, the remarkable story of risk, peter bernstein notes that “ the essence of risk management lies in maximizing the areas where we have some control over the outcome while minimising the areas where we have absolutely no control over the outcome and linkage between effect and cause is hidden from us. ” traditionally our respective institutions have predominantly focused on financial risk, but rebalancing over the past decade to strengthen nonfinancial risk management. however, over time, the lines between financial and non - financial risk have started – and will continue – to blur. this is apparent when one considers recent targeted cyber - attacks on critical infrastructure ( very timely in ireland this week ), the opportunities and risks presented by financial innovation driven by technological change, not least potential developments on central bank digital currency, and our learning from the recent response to the pandemic. and of course our shared risk and the necessity for collective action to address climate change as well as our collective efforts in support of sustainable finance. we believe in the importance of an independent central bank that is transparent, accountable and connected across all public policy domains, in ireland, in europe and across the world. we embrace diversity and inclusion as they strengthen us, as individuals and as an organisation. it is important that we foster a cultural foundation that supports implicit risk management, to avoid groupthink, while also implementing proportionate risk management frameworks, embedded to provide a systematic approach to explicit risk management that creates organisational value. effective operational risk management is a core enabler to the achievement of our vision to be trusted by the public, respected by our peers, and a fulfilling workplace for our people. it is a

##s. in this respect basle ii contributes to a more efficient pricing of risks. bank loans for high risk projects are becoming more expensive, while the opposite is true for low risk loans. but does this mean that it will become more difficult for risky projects to get financed by bank loans? not necessarily! one could rather expect the opposite effect. an increased level of monitoring and pricing of risks could also be beneficial for the financing of innovations. this is because both reduce the information asymmetry and lead to a greater allocative efficiency. hence risky innovative projects with a reasonable likeliness of success might pay higher loan premia but might also have better chances to find funding. in contrast, a less closer monitoring and pricing to risks could rather lead to credit constraints which are likely to be less efficient. now, i would like to draw your attention to the german venture capital market. the main virtue of venture capitalists is the combination of funding for high - risk projects with management support. as the us national venture capital association puts it, they are “ entrepreneurs first and financiers second, because they seek to add value through their experience in investing ”. venture capital only played a minor role in germany for a long time. promoting start - up firms only started to develop about ten years ago. over the last ten years, the amount of capital invested in german venture firms has increased from 0. 15 % to 0. 84 % of gdp, reaching about €18 billion in december 2003. despite this remarkable growth, venture capital is far less significant in germany than in the us where it has become a mainstream asset class, amounting to more than 2 % of gdp. before the peak of the stock market bubble was reached, there was a high funding surplus in the german venture capital market. this suggests that the bottleneck for further market growth was due to the structural impediments for an innovation - based production. in the last two years, gross investment in venture projects amounted to only €2. 4 billion or 0. 12 % of gdp. moreover, after the bubble burst, there were considerable shifts from financing high - risk to low - risk later stages. these shifts reflect a reduced risk appetite among investment companies. the gradual disappearance of the ipo option has discouraged those who had assumed an exit via the stock exchange. after stocks had crashed on the “ neuer markt ” divestments became less profitable. today, there are some signs of optimism and new momentum on the german