Ladies and gentlemen,

It is a great pleasure for me to be speaking here at Risk Europe 2009. Over the last few years this annual conference has succeeded in gathering together the brightest minds in both academia and financial practice in the area of risk management, offering interesting and topical discussions and providing valuable insights into future developments in this field. And I’m sure you will agree with me when I say that the challenges faced by risk managers in the financial world have rarely been more complex than they are at present. I would like to focus today on how a central bank can help the risk management community to address these challenges. I will also highlight the restrictions that I see in central banks’ operational leeway. However, I will not consider the macro-prudential role of a central bank, recognising that this is a topic large enough to merit a separate discussion.

A few years ago, it would probably have been unusual for a central banker to be giving a speech at a conference on risk. Today, we know that central banking and risk management are very much interconnected. First, central banks have played a key role worldwide – through their operations in financial markets – in alleviating the implications of the dramatic intensification of banks’ liquidity risk since the summer of 2007. It is no exaggeration to say that central banks have become the best friends of banks’ liquidity risk managers. Second, central banks have learned that their own financial risk management is crucial if they are to deliver, in a prudent manner, the best possible liquidity support for strained markets and financial institutions.

While central banks have certainly done a lot, there are no shortage of proposals for other things that central banks should do. Having the ability to create unlimited purchasing power at short notice without being constrained by internal liquidity considerations, central banks have often been regarded as having limitless power to resolve economic crises.

Such discussions concerning the limits on central banks’ ability to intervene – and the dangers if these limits are ignored – are not new. One of the most famous discussions on this topic is Milton Friedman’s presidential address to the American Economic Association in 1968, entitled “The role of monetary policy” ^[1]. The address consisted of three main sections: the first on “What monetary policy cannot do”; the second on “What monetary policy can do”; and finally a third on “ How should monetary policy be conducted?”

While opinions on monetary policy have changed a lot since 1968, I would like to follow the structure of Friedman’s address – focusing, however, on central banks’ policies for the management of financial crises.