Author(s): Massimiliano Castelli and Stefan Gerlach
Date published: Jun 2019
SUERF Policy Note, Issue No 78
by Massimiliano Castelli, UBS Asset Management
and Stefan Gerlach, EFB Bank and CEPR
JEL-codes: E58, F33, G11.
Keywords: Foreign exchange reserves, asset management, diversification, central banks.
This Policy Note asks whether central banks are too conservative investors. Since reserves are held for foreign exchange intervention, central banks have prioritised holding safe assets that are liquid in episodes of market turmoil. Moreover, reserves were historically small and have only recently become so large that they exceed what could plausibly be needed for intervention. Several governance factors that bias central banks toward being too conservative are identified. These include a principal-agent problem between the central bank and the Ministry of Finance; the need to ensure sufficient asset management experience among board members and the senior management; and a bias towards a steady stream of profits arising from the profit distribution rules. To offset these problems, governance changes may be necessary.
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