Minutes of Macro-Finance Salon (No. 13): Trends and Challenges in Reserve Management

2014-10-26 IMI

Speaker:Marlene Amstad, Regional Adviser and Asset Management Representative at Bank for International Settlements in Hong Kong 26 October 2014, Beijing There is a sharp increase in reserves level since 1980s -FX reserves continue to accumulate since the beginning of this century;increases are mainly driven by Asian countries. China holds 3.75 trillion dollars as the largest reserve holder followed by Japan and Europe. -There are six precautionary motives to hold reserves including current account buffer, financial account buffer, exchange rate targeting, exchange rate stability, foreign exchange market stability and store of national wealth. -We need more reserves than we thought before crisis, but (probably) less than we have. Central banks consider two areas on reserve management including currencies and asset classes -Currency allocation is fairly stable, while it has an impressive growth in EME currencies. -Before crisis, asset classes were under-diversified and investments were too conservative. During crisis, reserve managers were “between a rock”and “at a hard place”. On the one hand, they did fundamental reassessing of the risks of different asset classes and reduced risk free investment universe. On the other hand, reserve managers were not able to benefit from a decrease of bond yield since it already dropped to almost zero in bond markets. -Emerging market is good diversifying, and it behaves differently from usual U.S treasury bonds. -It is not easy to diversify asset classes because currencies and bond returns are driven by one factor; however, the second factor is getting more and more important over time. Overall, diversification is not a one way street, each country should find its optimal reserves level and optimal diversification. After crisis, balance sheet of central banks is not only used for reserve management but also by monetary policy makers -Reserve portfolio is a part of other balance sheets which is used for different agendas. And central banks balance sheets are considered as a multi-purpose use after crisis. For further details All developments regarding IMI can be followed at http://imi.org.cn/. For further information, contact viaimi@ruc.edu.cn or on +86-10-62516755.

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Minutes of Macro-Finance Salon (No. 13): Trends and Challenges in Reserve Management

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