The political economy of central bank risk management

Central bank risk management has pervasive impact on financial markets. Bonds issued by controversial firms such as Shell and Ryanair are currently accepted as sufficiently safe collateral by many central banks, while in the past years EU Member States struggled to keep, and sometimes lost, that coveted status. Within their mandates, central banks often have considerable discretion over which assets get the benefit of eligibility in their operations and which risks they are willing to take. How central banks deal with financial risk is increasingly scrutinized for its impact on financial stability, environmental sustainability and public finances.
How do central bankers identify, monitor and mitigate financial risk? What ideas and norms govern decision-making, in particular when interests clash? How are internal disagreements resolved? Focusing on the European Central Bank, the dissertation answers these questions by studying how central banks deal with the politics of risk management.
Building on a wealth of documents from central bank archives and background interviews, the dissertation traces the evolution of ECB risk management through three periods: (i) The European Monetary Institute (1994-98), where after initially heated discussion, collateral expert taskforces fail to agree one collateral framework for the ECB and each central bank makes its own rules. (ii) In the mid-2000s, the ECB resolves its earlier disagreements by introducing sophisticated risk-modelling techniques into the heart of the collateral framework, resulting in a strict minimum credit rating requirement (iii) From 2007 onwards the ECB confronts consecutive crises but decision-making remains shaped by pre-crisis risk management practices.