Central Banks and Reserve Management

I have written about this on several occasions or at least on topics which are derivatives to this. The point is that some central banks are beginning to move into more risky asset classes in order to earn yield on their capital. Of course, there are many aspects to this and Brad Setser will probably have more to say but I think it is important to note that the discourse on central bank reserve management in a world where liquidity is ample afloat comes in at least two packages. Firstly, we have the Bretton Woods II discourse which deals with the USD peggers and the build of reserves to keep the peg. In this light, we have seen a lot of debate about the probability that some of the big USD peggers (i.e. petroexporters and China) would diversify their reserves into Euros or perhaps even Yen. Secondly, we have today's topic which deals with how CBs are moving into more risky asset classes in their search for yield.

(from the FT)

Central banks are becoming more active managers of their burgeoning foreign exchange reserves, seeking to increase the yield on their portfolios, according to a survey of reserve managers of the world’s central banks published on Monday.

Normally a secretive bunch owing to the conservatism of central banks and the scale of their investments, reserve managers told the journal Central Banking of rising pressures to provide their governments with decent returns in a low-yield environment.

When surveyed at the end of last year, many believed that there was no barrier in principle to investing in assets as risky as equities, although few were allowed to do so. But over a third of the central banks surveyed said their institutions had changed their investment guidelines in the past year.

The survey attracted responses from 47 reserve managers controlling $1,538bn (€1168bn, £784bn) under management out of a total of more than $4,700bn controlled by central banks worldwide. Conducted under anonymity, it did not receive responses from China or Japan, which control nearly $2,000bn between them.

Central Bank reserves have exploded since the start of the decade – the amount of money under management was £2,000bn ($2,911bn, €1519bn) in 2001 – as countries have sought to insure themselves against possible capital outflows and a liquidity crisis and some, such as China, have actively managed their exchange rates to prevent appreciation.

Note also the last part of the article which notes the apparent mismatch between CB's reserve managers' apparent willingness to put a growing amount of the reserves into equity but that only few of them are allowed to do so.