Survey of Reserve Managers: Lessons from the Crisis

Abstract

This paper reports in detail on a survey that was circulated to reserve managing central banks of IMF member countries in April 2012. The survey aims to gain further insight into how reserve managers have reacted to the crisis to date. The survey also aims to understand how reserve managers arrive at their strategic asset allocation and how they operate their risk management frameworks in practice. Some of the key themes that emerge from the survey include potential procyclical and counter cyclical behavior by reserve managers, increased focus placed on returns and wide variability across countries in how the currency composition of reserves is derived.

Towards greater diversification in central bank reserves

“…This point is worth stressing, as more and more central banks are investing in diversified asset classes. Indeed, based on a survey conducted by the IMF, Morahan and Mulder (2013) estimate that more than 15% of central banks invest part of their reserves in equity.…”

“…The SDR is based on a basket of international currencies comprising the U.S. dollar, Japanese yen, euro and pound sterling. https://www.imf.org/external/np/exr/faq/sdrallocfaqs.htm 6 Many central banks are planning to increase their holdings of advanced country currencies, which are not part of the SDR basket (Morahan and Mulder, 2013). 7 A "sudden stop" is an abrupt reduction in private capital inflows.…”

“…Under current market conditions, however, it has two major drawbacks: low profitability and high sensitivity to the risk of a rise in interest rates. Second, to overcome these drawbacks, we consider three alternative asset allocations in larger universes made up of: G4 currencies plus CAD and AUD (referred to as "G6 currencies"); G4 currencies plus other asset classes that have been included or considered for inclusion by many central banks (McCauley and Fung, 2003;Morahan and Mulder, 2013;Jones, 2014) 10 These shares correspond to the IMF average allocation of central banks in the G4 currencies (data collected in 2014, see footnote 2). These four currencies serve as the reference for the SDR and are now mostly used by central banks to diversify their foreign exchange reserves (Morahan and Mulder, 2013 Medeiros and Nocera (1988) show that the SDR plays a key role in central banks' reserve allocation.…”

Central Bank Reserve Management and International Financial Stability-Some Post-Crisis Reflections

“…From Q2-2007 to Q4-2010, reserve manager deposits with foreign commercial banks more than halved, a decline of more than US$300 billion ( Figure 2). The retrenchment was broad-based, with around half of surveyed central banks pulling deposits (Morahan and Mulder, 2013), and 85 percent also reducing deposit terms to facilitate withdrawals at short notice (Pringle and Carver, 2009). Continental European banks, to which reserve managers had been attracted by relatively high rates on U.S. dollar deposits, were particularly hard hit by reserve manager deposit outflows (Figure 3), amplifying the run by U.S. money market funds (MMFs) who also withdrew hundreds of billions of dollars from European banks in a matter of weeks following the Lehman Brothers collapse (Baba et al, 2009;McGuire and von Peter, 2009).…”

“…Curiously, however, the policy implications associated with this issue, and what might be done about it, have received relatively little attention-in contrast to the extensive literature on reserve adequacy (focused on the determination of the appropriate level of reserves, rather than how they are invested) which has continued to swell virtually unabated since the crisis. 3 The banking-centric study of Pihlman and van der Hoorn (2010), and the securities market treatment in McCauley and Rigaudy (2011) are therefore valuable contributions, and usefully supplemented by the survey of Morahan and Mulder (2013), albeit the event-study orientation of these previous works leaves them confined mainly to documenting aspects of reserve manager behavior in the crisis. Events during the crisis also prompted the revised Guidelines for Foreign Exchange Reserve Management (IMF, 2013) to recognize the issue and make reference to reserve managers' obligations in giving consideration to the risk of market disruptions directly or indirectly (through signaling effects) induced by their actions, 4 but, as high-level Guidelines, they understandably stop short of weighing conjunctural vulnerabilities or setting out prescriptive remedies.…”