Assessing the Financial Risks and Buffers of the Central Bank

The global financial crisis brought about significant changes in the size and composition of euro area national central banks’ (NCBs) balance sheets, and led to substantially increased financial risks. Realised losses can have negative consequences for the independence, policy effectiveness and credibility of central banks and thus, in recent years, NCBs have been paying much closer attention to the measurement of risks on their balance sheet, and to the appropriateness of their financial buffers. This includes increasing the scope of risk measurements, enhancing risk measurement tools, and expanding the actions taken to mitigate risks. The Central Bank of Ireland (the Central Bank) has similarly developed its risk measurement tools and practices during this period. This includes the introduction of risk provisions, and the introduction of a broader framework to facilitate a more risk-based assessment of the Central Bank’s financial buffers position. The framework’s use of stress scenarios, as well as the application of a multi-year, dynamic balance sheet approach to estimating the Central Bank’s risks, serves as an important guide to determining the adequacy of capital and reserves– thereby helping to preserve financial independence.