The definition of legal risk and its management by central banks

Katja Wurtz, Principal Legal Counsel, European Central Bank, Germany

Currently, there are no international rules specific to central banks on what is to be understood by "legal risk" and how it should be managed. In the context of the discussion on Basel II (the International Convergence of Capital Measurement and Capital Standards), it was considered that assessing, monitoring and mitigating legal risk may positively affect the way in which financial institutions conduct business. Basel II was transposed into Community legislation by means of the Recast Banking Directive2 and the Recast Capital Adequacy Directive 3 which do not define the concept of legal risk but instead include it under the wider definition of operational risk. The concept of legal risk as applied by central banks may have some common ground with the concept as applied to credit institutions. However, when managing legal risk, the fundamental differences between central banks and credit institutions in terms of functions, risk profile, etc. and the roles of central banks as public entities and the risk of reputational loss related to their tasks need to be taken into account. Nonetheless, some elements of managing legal risk may be common to both central banks and credit institutions, depending on the special characteristics of the institution in question.

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Germany Regulation Banking & Finance June 2007 Vol. 1, No. 1, Autumn 2007

Katja Wurtz

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Katja Julie W├╝rtz, Principal Legal Counsel at the European Central Bank specialised in financial Community legislation since 1999 with a focus on payment systems and banking related matters. Previously employed as in-house legal counsel at Danmarks Nationalbank from 1996-1999. Publications in Butterworths Journal of International Banking and Financial Law and Euredia.

European Central Bank

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According to Article 105(1) of the Treaty EC, the primary objective of the European System of Central Banks (the ESCB) is to maintain price stability. Without prejudice hereto, the ESCB shall support the general economic policies in the Community with a view to contributing to the achievement of the objectives of the Community. Moreover, the ESCB shall act in accordance with the principle of an open market economy with free competition, favouring an efficient allocation of resources. Article 105(2) of the Treaty EC lays down that the basic tasks to be carried out through the ESCB shall be to (i) define and implement the monetary policy of the Community, (ii) to conduct foreign-exchange operations consistent with the provisions of Article 111, (iii) hold and manage the official foreign reserves of the Member States, and (iv) promote the smooth operation of payment systems. Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006 relating to the taking up and pursuit of the business of credit institutions (recast), (OJ L 177, 30.6.2006, p. 1

Germany Regulation Banking & Finance June 2007 Vol. 1, No. 1, Autumn 2007
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