carlos da silva costa : risk management for central banks opening remarks by mr carlos da silva costa, governor of the bank of portugal, at the joint bank of portugal and european central bank conference on " risk management for central banks ", lisbon, 25 september 2017. * * * thank you very much for your presence, i welcome you all and i hope that this conference and your stay will be very pleasant as summer turns to autumn here in lisbon. the first point i would like to make is that carlos bernardel, helena adegas and i first planned to organise this conference two years ago. we are now able to say that it was the right decision, and i think that by the end you will be the first to witness that. when we took the decision to go ahead with this conference, risk management was an important matter. but now it is even more important. there is a lot of thinking available on this matter, but aside from the available thinking, we have a lot of problems to solve. and this means that we need new thinking on ways to solve the problems linked to risk management. my opening remarks will take a different approach to my closing remarks at the end of the conference. i would like to speak initially about central banks and the way they face, or are faced by, risks. central banks are ‘ complex entities ’ with broad mandates. firstly, central banks are policy - makers and regulators. secondly, they are also corporations and service providers. and they are asked to be accountable in both these capacities that are very important for the economy and society. as policy - makers and regulators, central banks pursue a public interest mission of delivering price stability and safeguarding financial sustainability. as corporations and service providers they have to be well managed, they need to be efficient and they need to care about sustainability. the risk management framework within central banks needs to take into account these two different – and sometimes conflicting – realities. as policy - makers, we need to understand that the financial crisis, and the context in which the crisis emerged and developed, provide ample food for thought about the role of central banks, including the issue of risk management. indeed, policy - making involves different types of risks and uncertainties. when we speak about risk management, it is not only about asset management, but also about risk associated with our own decisions, to act or to defer action, because we are creating uncertainties for third parties and for the economy. for instance, the central bank may base the

definition of its policies on a faulty representation of reality, either because the models used are conceptually wrong or incomplete, or because the coefficients are no longer right. and if you recall our past history of this crisis you see that these two risks were very present : the quality of the models and the quality, or the accuracy, of the coefficients. under certain circumstances, the central bank may also lack the necessary tools to achieve its policy objectives ; or it may have to cope with deficiencies in the institutional setting – and i have plenty to say about the institutional setting and the difficulties created for the central bank by a lack of the right institutional setting – or it may have to cope with failures in coordination with the other relevant policy - making authorities. and when we speak about coordination and risks for central banks, we also have plenty to say. materialisation of these risks may lead to a late recognition of accumulating imbalances. this, in 1 / 4 bis central bankers'speeches turn, results in a failure to prevent imbalances from reaching a point when disruptive adjustment becomes inevitable and a crisis emerges. this means that our main risk as a central bank in terms of policy - making is to act at the right moment in order to avoid making later action harder, ultimately leading to a crisis. once a crisis erupts, the nature of the risks changes, calling for more action by the policymaking authorities. initially, the priority must be to manage the crisis and mitigate its immediate impact. i am reminded of the popular portuguese saying : ‘ in times of war there is no time to clean weapons ’. and that is how it was during the crisis. when we are facing problems we need to act, despite the presence of some risks. that is why initially the priority must be to manage the crisis and to mitigate its immediate impact. unconventional, and often untested, measures are put in place, and the question arises as to, first : what are the right doses of the medicine and the right duration of the intervention? then one has to worry about the adjustment process towards a new ‘ steady state ’, and second, about reducing the probability of similar crises occurring in the future. this means that we are simultaneously in a situation where we need to ensure that the patient will survive, but the risks associated with the medicine will also be under control. the dilemma here is again on the appropriate doses : how to facilitate and speed up the adjustment while minimising the risk