Inaugural RAMP Survey On The Reserve . - World Bank
Public Disclosure AuthorizedD E V E LO P M E N TPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedKNOWLEDGE ANDLEARNINGInaugural RAMPSurvey on the ReserveManagement Practicesof Central BanksResults and ObservationsThe Reserves Advisory and Management Program (RAMP)
DEVELOPMENT KNOWLEDGE AND LEARNINGInaugural RAMP Survey onthe Reserve ManagementPractices of Central BanksResults and ObservationsThe Reserves Advisory and Management Program (RAMP)
2019 International Bank for Reconstruction and Development / The World Bank1818 H Street NW, Washington, DC 20433Telephone: 202-473-1000; Internet: www.worldbank.orgSome rights reserved1 2 3 4 22 21 20 19Books in this series are published to communicate the results of Bank research, analysis, and operationalexperience with the least possible delay. The extent of language editing varies from book to book.This work is a product of the staff of The World Bank with external contributions. The findings,interpretations, and conclusions expressed in this work do not necessarily reflect the views of TheWorld Bank, its Board of Executive Directors, or the governments they represent. The World Bank doesnot guarantee the accuracy of the data included in this work. The boundaries, colors, denominations,and other information shown on any map in this work do not imply any judgment on the part of TheWorld Bank concerning the legal status of any territory or the endorsement or acceptance of suchboundaries.Nothing herein shall constitute or be considered to be a limitation upon or waiver of the privileges andimmunities of The World Bank, all of which are specifically reserved.Rights and PermissionsThis work is available under the Creative Commons Attribution 3.0 IGO license (CC BY 3.0 IGO) http://creativecommons.org/licenses/by/3.0/igo. Under the Creative Commons Attribution license, you are freeto copy, distribute, transmit, and adapt this work, including for commercial purposes, under the followingconditions:Attribution—Please cite the work as follows: World Bank. 2019. “Inaugural RAMP Survey on the ReserveManagement Practices of Central Banks: Results and Observations.” Development Knowledge andLearning. Reserves Advisory and Management Program, World Bank, Washington, DC. License: CreativeCommons Attribution CC BY 3.0 IGOTranslations—If you create a translation of this work, please add the following disclaimer along with theattribution: This translation was not created by The World Bank and should not be considered an official World Bank translation. The World Bank shall not be liable for any content or error in thistranslation.Adaptations—If you create an adaptation of this work, please add the following disclaimer along with theattribution: This is an adaptation of an original work by The World Bank. Views and opinions expressedin the adaptation are the sole responsibility of the author or authors of the adaptation and are notendorsed by The World Bank.Third-party content—The World Bank does not necessarily own each component of the content contained within the work. The World Bank therefore does not warrant that the use of any third-partyowned individual component or part contained in the work will not infringe on the rights of those thirdparties. The risk of claims resulting from such infringement rests solely with you. If you wish to re-usea component of the work, it is your responsibility to determine whether permission is needed for thatre-use and to obtain permission from the copyright owner. Examples of components can include, butare not limited to, tables, figures, or images.All queries on rights and licenses should be addressed to World Bank Publications, The World BankGroup, 1818 H Street NW, Washington, DC 20433, USA; e-mail: pubrights@worldbank.org.SKU: K880263Cover photo: MarianVejcik / Getty Images. Used with permission; further permission required for reuse.Cover design: Debra Naylor / Naylor Design Inc.
iiCHAPTER 1: Introduction 1Notes 3CHAPTER 2: Key Findings 5Note 7CHAPTER 3: Results and Observations 9Governance 9Strategic asset allocation 18Portfolio management 27Risk management 31Performance reporting and transparency 34Notes 35CHAPTER 4: Concluding Commentary 37Appendix A 3.63.73.83.93.10Global foreign exchange reserves, 1998–2018 1Global foreign exchange reserves as a percentage of global trade,1998–2017 2Investment policy decision-making process 10SAA decision-making process 11Organizational structure for reserve management responsibilities 11Motives for holding foreign exchange reserves 12Motives for holding foreign exchange reserves by country-income group 12Reserve adequacy measures 13Reserve adequacy assessment by country-income group 14Numeraire 15Numeraire choice by country-income category 15Investment principles 16iii
iv Inaugural RAMP Survey on the Reserve Management Practices of Central 43.353.363.373.383.39A.1A.2A.3A.4A.5A.6A.7Central banks by country-income group that consider return generationhighly relevant 17Investment horizon of investment tranche 17Use of tranching by country-income group 18Percentage of respondents that may hold each currency as part of theirforeign exchange 19Factors shaping currency composition 20Distribution of all respondents’ allocations to individual currencies 20Distribution of allocations to currencies for those central bankswith exposure 21Net number of central banks that plan to increase or decrease an allocationto specific currencies within 2 years 22Eligible asset classes 23Higher risk financial instruments that are eligible asset classes 24Distribution of all respondents’ allocations to individual asset classes 24Distribution of the allocation to individual asset classes for respondentswith exposure 25Comparison of allocation to traditional asset classes and months of importcoverage of foreign exchange reserves 26Comparison of allocation to traditional asset classes and months of importcoverage of foreign exchange reserves of emerging market respondents 26Portfolio management styles 27Reasons for hiring external managers 28Foreign exchange reserve allocations to external managers 29Use of derivatives 29Incorporation of ESG factors into the investment framework 30ESG and equity investing 30Minimum credit ratings by asset class 31Credit assessment methodologies 32Credit assessment methodologies for respondents with corporatecredit exposure 32Credit analysis techniques of respondents with minimum credit ratings ofBBB- for at least one asset class 32Metrics for measuring market risk 33Market risk measurement metrics for respondents that use active or enhancedindexing styles 33Types of stress scenarios employed 34Highest frequency of reporting to the board 35Mandatory or voluntary disclosure of reserve management performance 35Respondents’ foreign exchange reserve allocation to traditional asset classesand level of short-term external debt coverage 39Emerging market respondents’ foreign exchange reserve allocation totraditional asset classes and level of short-term external debt coverage 40Respondents’ foreign exchange reserve allocation to traditional asset classesand reserve cover of ARA metric level 40Emerging market respondents’ foreign exchange reserve allocation totraditional asset classes and reserves cover of ARA metric level 41Use of external managers by country-income group 41Performance attribution models 42ESG and investing in corporate bonds 42Table1.1Survey participants’ reserve levels and adequacy metrics 3
AcknowledgmentsThis report shares results and observations arising from data that the ReservesAdvisory and Management Program (RAMP) collected from 99 central banksfrom around the world as part of its inaugural survey of these institutions’ reservemanagement practices. Although published under an institutional rubric, it isthe product of the work of many individuals.The authors of the report, listed alphabetically, are Keyvan H. Alekasir,Nikoloz Anasashvili, Matias Antonio, Philip Dongsoo Hong, Daniela M. H.Klingebiel, Bernard Murira, Guilherme Henrique Pereira Alves, Marco AntonioRuiz Gil, Alexander E. Slater, and Daisuke Takahashi.In writing this report, the authors benefited from valuable contributions froma host of others and are grateful for their support. An initial draft received comment from the following World Bank colleagues: George Bentley, Eric Bouye,Steen Byskov, Otilia Iulia Ciotau, Roberto A. De Beaufort Camargo, Erik Feyen,Bjoern Geir From, Natan Goldberger Rico, Attila Juhasz, Azzedine Lazizi,Wendy Mendes, Stephane Piot, Mahmut Rustem Sen, and James Seward. Thefollowing colleagues at the Bank of International Settlements also providedfeedback: Pierre Cardon, Stijn Claessens, Mike McMorrow, Vahe Sahakyan, andMichela Scatigna.The authors would also like to thank the staff of the 99 central banks whoanswered the survey’s questions. Without their input, none of this would havebeen possible.v
-backed securitiesAssessing Reserve AdequacyAustralian dollarCanadian dollarSwiss francconditional value at riskemerging marketenvironmental, social, and governanceeuroBritish pound sterlinggross domestic productInternational Monetary FundJapanese yenKorean (Rep. of ) wonmortgage-backed securitiesNorwegian kroneNew Zealand dollarReserves Advisory and Management Programrenminbistrategic asset allocationspecial drawing rightsSwedish kronaSingapore dollarsupranational, sovereign, and agencyUnited States dollarvalue at riskSouth African randvii
1IntroductionOver the past two decades, global foreign exchange reserves have increasedmore than six-fold, reaching US 12.6 trillion as of March 31, 2018.1 Aggregatereserves peaked in 2014 and decreased moderately thereafter for approximately2 years—mostly due to a decline in emerging market economies’ reserves thatarose in part from a fall in commodity prices—before rebounding (see figure 1.1).Reserve accumulation has also exceeded the expansion in trade over the last20 years (see figure 1.2).This historically unprecedented growth in foreign exchange reserves accelerated the evolution of central banks’ asset management practices (Eichengreenand Flandreau 2014). Many of these institutions expanded their focus beyondthe traditional investment objectives of liquidity and safety to include incomegeneration. In doing so, they faced additional challenges arising from the extraordinary policy responses to the unprecedented economic conditions followingthe financial crisis.FIGURE 1.1Global foreign exchange reserves, 1998–2018Reserves (trillion)14US 12.612108US 5.4US 4.164US 09201020112012201320142015201620120 7180YearRegionsChinaAdvanced economiesEmerging and developing economies (excl. China)WorldSource: IMF, International Financial Statistics.1
Inaugural RAMP Survey on the Reserve Management Practices of Central BanksFIGURE 1.2Global foreign exchange reserves as a percentage of global trade,1998–20176055504028302318182010 814RegionsChinaAdvanced 006200520042003200220012000201920099298Percent of global trade 192YearEmerging and developing economies (excl. China)WorldSources: World Bank, World Development Indicators; IMF, International Financial Statistics.The World Bank Treasury’s Reserves Advisory and Management Program(RAMP) concluded its inaugural survey on central banks’ reserve managementpractices in the spring of 2018. The goals were to take stock of and develop amore complete understanding of these institutions’ reserve management policies and practices globally. The survey’s objectives were (1) to construct a pictureof reserve management activities across multiple regions; and (2) to provide anopportunity for central banks to benchmark their actions and perspectivesagainst peer institutions.The survey addressed key areas of public asset management. Its content covered (1) governance and policy; (2) strategic asset allocation; (3) portfolio management; (4) risk management; and (5) performance reporting and transparency.The survey posed 36 questions across these areas, some of which requested additional information depending on the participants’ answers. Some queries gavea prescribed set of potential responses; others requested specific data.The results comprise input from 99 central banks and reflect an overallresponse rate of approximately 80 percent. Respondents represent countrieswith different income levels and from multiple regions (see table 1.1).2 Theiramounts of foreign exchange assets and levels of reserve adequacy cover a widerange.3 Although most participants provided substantial amounts of information, some did not answer every question. When presenting data, this reportidentifies the number of institutions responding to the relevant question(or each section of a question when necessary), either in the main text or in corresponding charts and tables.Data is presented in an aggregate and unattributed format to maintain respondents’ anonymity.4 Observations on this information arise from assessmentsthrough various lenses, including country-income group, measures of reserveadequacy, and monetary policy and exchange rate regimes. Where this analyticalprocess identified patterns, the report shares these findings.The remainder of this report is organized in three parts. Section 2 highlightsits key findings. Section 3 describes the survey’s results and offers observationson patterns in the data. Finally, section 4 discusses potential policy implications arising from the responses and analysis.
IntroductionTABLE 1.1 3Survey participants’ reserve levels and adequacy metricsNUMBEROFCENTRALBANKSMEDIANGDP PERCAPITA(USD)Americas and Caribbean16East Asia and Pacific17Europe and Central AsiaREGIONMiddle East and North AfricaSouth AsiaNATIONAL RESERVE LEVELSRESERVE ADEQUACY METRICSMEDIAN TOTALRESERVES(000,000 USD)MEDIAN OFTOTAL RESERVESTO GDPMEDIAN MONTHSOF IMPORTCOVERAGEMEDIAN OF TOTALRESERVES TO SHORTTERM DEBT 1,8617,2680.168.43.5191,7082,3530.154.02.4High income (reserve)1616,06933,1590.275.81.6High income (non-reserve)1651,26575,9010.062.50.1Upper middle income307,49112,5010.225.52.7Lower middle b-Saharan AfricaCOUNTRY-INCOME GROUPaLow incomeSource: World Bank, World Development Indicators (October 2018).Note: GDP gross domestic product.a. Some charts in this report present data on a country-income group basis. Percentages in these charts are based on the total number of surveyrespondents in a given country-income group, rather than the number of institutions in a country-income group that provided data on the specific topic.Therefore, percentages in these charts will not sum to 100 if the number of respondents to the question were less than the overall survey sample of99 institutions.NOTES1. This report defines “foreign exchange reserves” as the pool of non-domestic currencydenominated assets a central bank or monetary authority holds for meeting a defined rangeof objectives. The reserve management entity is responsible for the investment of thiswealth and curation of associated risks. At times, this report may use terms such as “reserveassets,” “reserve holdings,” or “foreign currency reserves” or even “reserves” in referencingthis pool of wealth.2. This report uses the World Bank’s customized country-income group categories based onGNI per capita calculated using the World Bank Atlas Method. It separates countries into“low income” (less than 1,005); “lower middle income” ( 1,006– 3,955); “upper middleincome” ( 3,956– 12,235); and “high income” groups (more than 12,235) (World BankData Team 2017). Because of the report’s subject matter, it further divides the “highincome” category into “high income reserve” and “high income non-reserve” batches. Theformer encompasses only those that print currencies most often held as foreign exchangereserves by other central banks. The latter encompasses all others in the high-incomecountry category.3. There are various ways of measuring the adequacy of central banks’ levels of foreignexchange reserves, including coverage of imports and short-term debt obligations. Unlessotherwise specified, this report uses the term to reference a central bank’s possession ofsufficient levels of reserve assets to execute its mandate and achieve its objectives.4. RAMP staff believed that confidentiality would facilitate central banks’ participation andcandid and comprehensive responses given the sensitive nature of their operations.
2Key FindingsOver the past 20 years, managers of foreign exchange reserves have had torespond to two major market developments—a substantial increase in theamount of these assets globally and the extraordinary policy responses to theunprecedented macroeconomic and investment environment after the globalfinancial crisis.The survey’s key findings suggest that, despite these factors, most centralbanks continue to employ a traditional reserve management approach. Theirinvestments remain concentrated in high-quality fixed-income assets and theminimum credit rating for these holdings remains conservative.At the same time, the data suggest that important changes are underway as amaterial number of central banks reported more diversified portfolios withexposure to non-traditional asset classes. A third of respondents hold corporatecredit, most of which is investment grade, and almost one in five own mortgage-backed securities (MBS) or equities, although mostly in limited allocations.Our analysis of this information did not find a relationship between respondents’measures of reserve adequacy and the size of their exposure to non-traditionalasset classes. The data exhibit considerable cross-country differences in the waycentral banks manage their reserves and, in some circumstances, our analysissuggests these differences correlate with respondents’ country-income groups.The key findings on governance and policy are as follows:1. Central banks use a diverse set of arrangements to guide and implement theirreserve management activities. They divide these responsibilities among variousinstitutional bodies and use distinct approaches to execute mandates like investment policy development and construction of a strategic asset allocation (SAA).2. Self-insurance against external shocks is the primary motive for holding foreignexchange reserves that central banks most frequently consider highly relevant.They also deem conducting foreign exchange policy and servicing external debt ofsimilar importance albeit less often. Saving for intergenerational equity does notappear to be a major concern even with the substantial increase in global holdings of foreign exchange assets.5
6 Inaugural RAMP Survey on the Reserve Management Practices of Central Banks3. Most central banks measure reserve adequacy in one way or another. They mostfrequently use the import coverage method followed by short-term external debtratio, broad money ratio, and the IMF’s Assessing Reserve Adequacy (ARA) metric.14. The United States dollar (USD) and domestic currency are the most frequentlyused numeraire currencies. Almost all central banks in the middle- and low- income country groups use the U.S. dollar as numeraire. In contrast, a substantial majority in high-income reserve countries use domestic currency.5. Almost all central banks consider safety and liquidity as highly relevant priorities.More than a third also highlight returns/income
the financial crisis. . INAUGURAL RAMP SURVEY ON THE RESERVE MANAGEMENT PRACTICES Of CENTRAL BANKS The World Bank Treasury’s Reserves Advisory and Management Program (RAMP) concluded its inaugural survey on central banks’ reserve management practices in the spring of 2018.The goals were to take stock of and develop a more complete understanding of these institutions’ reserve management .
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