Reserve management and FX intervention

BIS Papers  |  No 104  | 
31 October 2019

Papers in this volume were prepared for a meeting of senior officials from central banks held at the Bank for International Settlements.

Foreign exchange (FX) reserves are an integral part of emerging market economy (EME) central banks' policy toolkit. They insure against shocks and complement monetary policy to achieve price and financial stability. Over the last decades, they have surged from, on average, 5% of GDP in 1990 to almost 30% in 2018. This raises several interrelated issues that are explored in this volume. It contains revised papers that were originally prepared for a meeting of Deputy Governors of central banks from EMEs. 

Several papers discuss the determinants of reserve levels in EMEs. Precautionary motives have been the predominant motive in the past and continue to play an important role. Many contributions, however, highlight that reserve accumulation more recently has often been the by-product of FX interventions related to monetary and exchange rate policies. This has changed cost-benefit considerations. And it raises questions about potential alternatives to reserve accumulation such as macroprudential tools or capital flow measures. 

Another set of papers address questions related to the intermediate objectives, strategies and tactics of FX interventions. A summary paper provides survey evidence from the 21 participating central banks. Leveraging data from similar surveys conducted in the past, it also illustrates how central banks' views and conduct have evolved over the years. Several contributions provide deeper insights on FX interventions from a country perspective, indicating for instance diverse experiences on how effective interventions have been in different countries. 

Finally, questions on how reserves should be managed are explored. In an environment of low yields for traditional reserve assets, growing reserves have put pressure on central banks to find profitable yet safe investment opportunities. A number of papers show that central banks responded by diversifying their investments and, in some cases, by taking additional risks. These papers also explain how countries' risk management, accounting, and governance structures influence their reserve portfolio allocation. A survey paper summarises recent trends.