Alternatives to self-insurance

Remarks by Mr Stephen G Cecchetti, Economic Adviser and Head of Monetary and Economic Department of the BIS, prepared for the Swiss National Bank - International Monetary Fund High-Level conference on the International Monetary System, Zürich, 11 May 2010.


Global foreign exchange reserves have grown rapidly over the past decade. This raises questions about how much reserves are needed for self-insurance. A lesson of the crisis is that the combination of currency and maturity mismatches can lead to global liquidity shocks. Monitoring and containing the build-up of mismatches is a challenge. Central bank swap lines and foreign exchange reserves helped to resolve the acute dollar shortage of 2008. How could countries ensure that they have access to foreign currency funding during future crises? Three options are self-insurance, where a country purchases reserves outright or borrows them; bilateral agreements; and multilateral agreements. These are complements, not substitutes, so countries will probably continue to rely on a mix of arrangements.