Book contents
- Frontmatter
- Contents
- List of figures
- List of tables
- List of boxes
- Foreword
- Introduction
- Part I Investment operations
- Part II Policy operations
- 7 Risk management and market impact of central bank credit operations
- 8 Risk mitigation measures and credit risk assessment in central bank policy operations
- 9 Collateral and risk mitigation frameworks of central bank policy operations – a comparison across central banks
- 10 Risk measurement for a repo portfolio – an application to the Eurosystem's collateralized lending operations
- 11 Central bank financial crisis management from a risk management perspective
- Part III Organizational issues and operational risk
- References
- Index
11 - Central bank financial crisis management from a risk management perspective
Published online by Cambridge University Press: 23 December 2009
- Frontmatter
- Contents
- List of figures
- List of tables
- List of boxes
- Foreword
- Introduction
- Part I Investment operations
- Part II Policy operations
- 7 Risk management and market impact of central bank credit operations
- 8 Risk mitigation measures and credit risk assessment in central bank policy operations
- 9 Collateral and risk mitigation frameworks of central bank policy operations – a comparison across central banks
- 10 Risk measurement for a repo portfolio – an application to the Eurosystem's collateralized lending operations
- 11 Central bank financial crisis management from a risk management perspective
- Part III Organizational issues and operational risk
- References
- Index
Summary
Introduction
Providing emergency liquidity assistance (ELA) or being the lender of last resort (LOLR) are considered to be amongst the most important tasks of central banks, and literature on the topic is correspondingly abundant (see e.g. Freixas et al. 1999, for an overview). To avoid confusion relating to the specific definitions given and uses made of these terms in the literature and in the central banking community, this chapter uses the broad concept of ‘central bank financial crisis management’ (FCM), which encompasses ELA and LOLR. Apart from some important general clarifications of direct usefulness for the practitioner (from Bagehot 1873 to e.g. Goodhart 1999), the literature on FCM takes mainly an academic perspective of microeconomic theory (e.g. Freixas and Rochet 1997; Repullo 2000; Freixas et al. 2003; Caballero and Krishnamurthy 2007). While this microeconomic modelling of the functioning of FCM is certainly relevant, doing practical FCM at the right moment and in the right way requires more than that. In particular, it requires three disciplines of applied central banking, namely central bank liquidity management, central bank risk management and prudential supervision. The role of risk management has been stressed recently by W. Buiter and A. Sibert in their internet blog posted on 12 August 2007, just days after the break-out of the financial market turmoil:
A credit crunch and liquidity squeeze is … the time for central banks to get their hands dirty and take socially necessary risks which are not part and parcel of the art of central banking during normal times when markets are orderly. […]
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- Risk Management for Central Banks and Other Public Investors , pp. 394 - 440Publisher: Cambridge University PressPrint publication year: 2009
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