4Non-technical summary 5

The paper explores the relation between individual banks' liquidity management in the euro area and the ECB's management of the aggregate current accounts held by banks with the Eurosystem. It is argued that, in the case of the euro area with its large, remunerated reserve requirements that have to be fulfilled only on average over a one‐month period, the banks' demand for working balances to serve as a buffer against market imperfections is always below reserve requirements. It is therefore normally sufficient for the ECB when steering short‐term interest rates to control aggregate liquidity in a way that the aggregate banking system is in a position to fulfil adequately its reserve requirements. In particular, the ECB normally does not need to take care of any factors that affect temporarily the demand for working balances, such as the level and uncertainties of interbank payment flows. However, two exceptions are noteworthy and are discussed in the paper: the banks' balance sheet management activities implying a regular end of month peak of the EONIA rate; and the liquidity situation in the case of substantive market tensions as in the days following the terrorist attacks of 11 September 2001. The need of the ECB's liquidity management to address the associated deviations from a model of perfect markets is discussed.

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Domestic and foreign financial assets of all central banks and public wealth funds worldwide are estimated to have reached more than USD 12 trillion in 2007. How do these institutions manage such unprecedented growth in their financial assets and how have they responded to the 'revolution' of risk management techniques during the last fifteen years? This book surveys the fundamental issues and techniques associated with risk management and shows how central banks and other public investors can create better risk management frameworks. Each chapter looks at a specific area of risk management, first presenting general problems and then showing how these materialize in the special case of public institutions. Written by a team of risk management experts from the European Central Bank, this much-needed survey is an ideal resource for those concerned with the increasingly important task of managing risk in central banks and other public institutions.

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