The risks taken into the European Central Bank's balance sheets are entirely under control and are accepted only because they are necessary to achieve the primary target of price stability, ECB President Mario Draghi said in a speech on Tuesday.
Speaking at the farewell conference honoring Bank of Israel Governor Stanley Fischer in Jerusalem, Draghi rejected arguments that the credit risk taken by the ECB on its balance sheets through its non-standard monetary operations imply a violation of its ordoliberal principles.
"The risks we take onto our balance sheet in the context of our operations are controlled, and they are accepted only insofar as they are strictly necessary for the pursuit of price stability," he said.
ECB credit is backed by adequate collateral, which implies that the amount of residual risk borne by the central bank is buffered, he said.
Draghi said there are two layers of protection. The first is founded on the ECB's recourse to the borrowing institutions and the full credit and guarantee represented by their balance sheets.
The second, when the first is exhausted, is given by the appropriation of the collateral posted as backing of the loan.
The use of risk control measures such as valuation haircuts and variable margins further mitigate the exposure to credit risk, he added.
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