Trends in central banks’ foreign currency reserves and the case of the ECB

ECB economists in this research discuss forex reserves:

This article begins with a review of the global trends in central banks’ foreign currency reserve holdings in terms of their size, adequacy and composition, and follows on to examine the ECB’s foreign currency reserves. Just as the reasons for holding reserves have changed over time and across countries, so too have the size and composition of those reserves. Views on appropriate adequacy metrics have also changed. Global foreign currency reserves grew markedly after the Asian financial crisis of the late 1990s, with emerging markets accumulating large reserves to self-insure against potential shocks. In some cases, the growth in reserves was a by-product of export-led growth strategies. While global foreign currency reserves have traditionally been invested primarily in US dollar-denominated financial assets, in recent years holdings have become more diversified in terms of both currency and asset classes.

The second section of the article describes how the ECB’s foreign currency reserves are invested in the light of its main purpose, which is to ensure that the Eurosystem has a sufficient amount of liquid resources whenever they are needed for its foreign exchange policy operations involving non-EU currencies. The investment framework includes three layers of governance, representing: i) the strategic investment policy; ii) medium-term tactical positioning; and iii) day-to-day portfolio management. The way in which the framework involves the national central banks (NCBs) of the Eurosystem in the active management of the ECB’s foreign currency reserves is both unique and intricate. The article describes this active management approach, the internal competition between NCB portfolio managers and the diversification of portfolio management styles that the framework fosters.


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