Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized THE FOURTH EDITION 2023 Reserve Management Survey Report INSIGHTS INTO PUBLIC ASSET MANAGEMENT ii © 2 0 2 3 I N T E R N AT I O N A L B A N K FOR RECONSTRUCTION AND DEVELOPMENT / THE WORLD BANK 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org RIGHTS AND PERMISSIONS The material in this work is subject to copyright. Because The World Bank encourages the dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to: World Bank Publications The World Bank 1818 H Street NW Washington, DC 20433, USA fax: 202-522-2625 e-mail: pubrights@worldbank.org COVER PHOTO © Cinefootage visuals / getty images. Used with permission; further permission required for reuse. PREFACE DISCLAIMER The Reserve Management Survey Report This work is a product of the staff of The provides the main results of the fourth World Bank, with external contributions. survey on reserve management practices The findings, interpretations, and conducted by The World Bank Treasury’s conclusions expressed in this work do not Reserve Advisory and Management necessarily reflect the views of The World Partnership (RAMP). Bank, its Board of Executive Directors, or the governments they represent. ACKNOWLEDGEMENTS The World Bank does not guarantee the This report was produced by the Treasury accuracy, completeness, or currency of the Advisory and Asset Management (TREAA) data included in this work. It does not assume Department under the general direction responsibility for any errors, omissions, or of Thérèse Couture, Director, TREAA. The discrepancies in the information or liability project was led by Eric Bouyé, Manager, for the use of or failure to use the information, Product, Knowledge & Research (TREPK) methods, processes, or conclusions set forth. unit, and Marco Antonio Ruiz Gil, Manager, The boundaries, colors, denominations, and Advisory and Partnership (TREAP) unit. other information shown on any map in this work do not imply any judgment on the part The survey design and data analysis for this of The World Bank concerning the legal report was coordinated by Carmen Herrero status of any territory or the endorsement or Montes. Individual contributors to the report acceptance of such boundaries. include Inga Aristakesyan, Parameswari Arunasalam, Elisa Baku, Romain Deguest, Nothing herein shall constitute or be Philip Dongsoo Hong, Batu El, Rezart Erindi, construed or considered to be a limitation Anne van der Graaf, Varun Mohur, Juan upon or waiver of the privileges and Carlos Quintero, Gary Rice, Jerome Teiletche, immunities of The World Bank, all of which and Daniel Vela Barón. are specifically reserved. Brittany DiMonte and Vic Bond contributed to the preparation and the distribution of the survey. Zarina Dela Cruz led the design and the report’s production, with editorial assistance from Sandrine Ntibarigobeka. The report benefited from comments and suggestions from staff. In particular, we thank Steen Byskov, Heung Sik Choo, Satoshi Ito, Robert Lucas, and James Seward for their comments. Contents Foreword 1 F INANCIAL RISK MANAGEMENT D.  43 Executive Summary 2 Credit Risk Management 43 Introduction 5 Market Risk Management 46 Trends in Reserve Management 8 Liquidity Risk Management 47 A. GOVERNANCE 8 Sustainable Investing (ESG) 48 Investment Objectives 8 Information Technology (IT) 56 Organizational Structure 10 Concluding Observations 60 Reporting and Transparency 12 References 61  TRATEGIC ASSET ALLOCATION B. S 14 Abbreviations 63 (SAA) Appendix 64 Tranching 14  URVEY BACKGROUND AND A. S 64 Risk Tolerance 19 METHODOLOGY Investment Horizon 22  ETAILED RESULTS FOR THE B. D 66 Duration 23 MOST RELEVANT QUESTIONS Currency Composition of Reserves 25 Governance 66 Numeraire 29 Strategic Asset Allocation (SAA) 67 Eligible Asset Classes 30 Tables & Figures 71 Asset Allocation 33 C. PORTFOLIO MANAGEMENT 36 Active Management 36 Derivatives, Investment Instruments, 39 and Investment Strategies External Management 40 1 1. Foreword Central bank reserve management is of utmost importance to ensure the financial stability and prosperity of countries. Reserves serve as a buffer to mitigate economic shocks, maintain exchange rate stability, and support the overall economic well-being of a country. Effective management of these reserves is essential for safeguarding a nation’s wealth and promoting sustainable economic growth. The Reserve Advisory and Management Partnership (RAMP) is an initiative spearheaded by the World Bank Treasury which provides technical assistance and capacity building to central banks and other public asset managers. RAMP works closely with central banks around the world, offering advisory services, meticulously crafted training programs, and a platform for knowledge sharing. Through a peer-to-peer approach, RAMP facilitates collaboration among practitioners, enabling them to leverage their expertise and experiences to optimize reserve management practices. The survey conducted by RAMP is a significant undertaking that aims to gather comprehensive insights into central banks’ reserve management practices. In the latest iteration of the survey, we are proud to announce a record-breaking number of participants, with the contribution of 125 central banks. This unprecedented level of participation demonstrates the importance and relevance of the survey in the global reserve management community. The invaluable insights from data collected through this survey allow us to identify trends, best practices, and areas for improvement in reserve management. It provides a one-of-a-kind opportunity for central banks to benchmark their practices against their peers and analyze the evolution of their reserve management strategies over time. This unique dataset is also invaluable for supporting the technical assistance provided by RAMP to its members. By leveraging this knowledge, RAMP can enhance its advisory services, tailor training programs, and provide targeted support to central banks, ultimately strengthening their capacity to manage reserves effectively. In summary, this survey report represents a collaborative effort between RAMP and central banks worldwide to advance the understanding and practice of reserve management. The cooperation of all central banks involved is greatly appreciated, and we anticipate that the findings obtained from this survey will make a valuable contribution to the ongoing success and resilience of central bank reserve management. Jorge Familiar Vice President and Treasurer of the World Bank 2 2. Executive Summary The World Bank Treasury’s Reserve Advisory and Management Partnership (RAMP) conducted its fourth survey on reserve management practices in 2023. One hundred and twenty-five central banks participated in the survey, responding to questions on a wide range of topics relevant to reserve management, such as governance, asset allocation, portfolio management, risk management, sustainable investing, and information technology (IT). Central banks faced a particularly challenging environment in 2022, with many of them, especially in developing countries, seeing decreases in reserves. On the one hand, a stronger dollar triggered central bank interventions to manage exchange rates, while on the other hand, an unprecedented increase in interest rates and the strength of the US dollar led to a decrease in reserves due to a valuation effect. Despite this complex environment, central banks were resilient. Negative returns did not cause substantial changes in reserve management policies. This demonstrates the strong governance underlying central banks’ reserve management. Central banks identified environmental, social, and governance (ESG) implementation, volatility, risk, and inflation as their main challenges in 2022. The survey found reserve managers maintained their conservative investment approaches, focusing on high-quality, fixed-income assets denominated in US dollars and euros. However, the significant and uncommon increase in interest rates in 2022 led institutions to slightly reduce the duration risk in their portfolios. Moreover, more central banks are embracing ESG practices for their reserve portfolios. The survey also showed that adopting new technologies in reserve management remains a slow process, although many central banks are upgrading their systems or acquiring new ones. Risk management, too, was revealed to be an area with room for improvement. Below are some survey findings on the main areas of reserve management. GOVERNANCE Central banks’ boards generally approve respondents have the middle office (i.e., risk bank investment policy. The investment management) in the same department as the guidelines are approved almost equally front office (i.e., investment management). by boards and by investment committees, Concerning staffing, respondents struggle showing an increase in the decision- with a shortage of candidates for hiring, high making power for the latter as compared to staff turnover, and a lack of an adequate previous surveys. Although organizational training budget. structures differ, 58 percent of the EXECUTIVE S U M M A RY 3 S T R AT E G I C A S S E T A L LO C AT I O N ( S A A ) Tranching reserve portfolios remains the the respondents now use value at risk (VaR). most common practice among central Our survey results show that the central banks. The investment tranche accounts for banks are very conservative when setting the largest share of reserves, followed by the risk tolerance levels. liquidity and working capital tranches. Central banks determine the size of the tranches Traditional asset classes, such as based on reserve adequacy metrics. government bonds from developed markets, bank deposits, money market instruments, The US dollar remains the dominant currency sovereign, supranational, and agency (SSA) in reserve portfolios, with the euro a distant bonds, and gold, have the highest allocation second. Central banks have not materially in reserve portfolios. Despite the increasing changed eligible currencies since our 2021 endeavors of central banks globally to survey. In line with their conservative risk include nontraditional asset classes in tolerance, central banks report a low duration reserve portfolios, these asset classes in their tranches and consolidated portfolios. still make up only a small portion, with an More than half of central banks reported average allocation of 13.6 percent across all reducing duration in 2022 in response to respondent banks. rising rates and high inflation. However, the duration changes, on average, were In the past two years, central banks increased not substantial compared to 2021. Another their allocation to money market products, interesting finding is that many central banks government bonds, and inflation-indexed have moved away from the probability of bonds. Lower portfolio durations, search for negative returns to define the risk tolerance quality, and protection from high inflation may of their reserve portfolios. More than half of have driven these changes. PORTFOLIO MANAGEMENT Most central banks actively manage at Seventy-seven percent of central banks least one of their portfolios. They deploy use external managers to manage a share different investment styles in each tranche of their reserves. Gaining exposure to and appear to increase their tolerance for nontraditional asset classes is an important risk as their investment horizon increases. motivation for hiring external managers. However, a small percentage (27 percent) use a risk budgeting framework to allocate Half of the respondents use derivatives to their active risk effectively. Reserve portfolios hedge risk. Repurchase agreements and were close to their strategic currency securities lending are allowed in almost half composition. Nonetheless, they did take of central banks. Interest in these instruments significant deviations from the strategic asset is growing. By contrast, exchange-traded allocation weights. funds (ETFs) remain a niche product (i.e., with an 18 percent adoption rate). EXECUTIVE S U M M A RY 4 RISK MANAGEMENT Central banks continue to manage credit mainly consist of fixed-income instruments. risk by investing mainly in debt with However, many central banks do not use investment-grade ratings (i.e., BBB+/BBB/ probabilistic risk metrics, like value at risk BBB- or above). Although rating agencies (VaR) or expected shortfall (or conditional remain the primary source of information on value at risk, CVaR), as hard limits. In addition, credit risk, 75 percent of respondents assess only 43 percent of central banks that deploy credit risk using other methodologies as active risk use tracking error (TE) and a risk well. At the same time, 52 percent of central budgeting framework. banks use a credit risk model to produce aggregate credit risk measures. Forty percent of the respondents do not monitor liquidity risk measures. Monitoring The detailed findings highlight that room liquidity risk is critical for reserve managers remains for central banks to strengthen to meet their financial obligations and their risk management frameworks. respond effectively to changing market Most central banks use duration limits to conditions. manage market risk, as reserve portfolios S U S TA I N A B L E I N V E S T I N G ESG practices are gaining traction in reserve sustainability. The main challenge in management. ESG adoption is more frequent adopting ESG investing is in balancing this for central banks with large reserves or that practice with the traditional investment are located in countries with higher incomes. objectives of safety, liquidity, and return. Environmental considerations are more important than social or governance factors Central banks mainly use labeled for central banks. government-issued and SSA bonds to implement their ESG strategies. While The primary motivating factors leading distinctive ESG strategies have expanded, central banks to include ESG are (i) the actual allocation to ESG instruments maintaining their reputation, and (ii) remains limited. In addition, central banks generating a positive impact. However, have started to embrace sustainability many central banks still have significant metrics in their reports. Carbon footprint is constraints on their mandates to implement the most prevalent measure. I N F O R M AT I O N T E C H N O L O G Y Vendor solutions are predominant in relied on legacy technologies, tools, and supporting key business areas of reserve manual processes, and adopting new management operations. Although central technology or replacing legacy systems banks have historically favored the on- in reserve management is a slow process. premises deployment model for reserve Nevertheless, many central banks are management systems, a small proportion upgrading their systems or acquiring new of central banks have adopted cloud- ones. It is thus critical to accelerate the based solutions. Central banks have adoption of new technologies. 5 3. Introduction The World Bank Treasury’s Reserve Advisory and Management Partnership (RAMP) launched its fourth survey on central banks’ reserve management practices in the first quarter of 2023, and a record-breaking number of 125 central banks contributed their responses. This biennial survey allows central banks to benchmark their practices against those of peer institutions and to examine their evolution over time.¹ Moreover, the data collected has allowed RAMP to improve its advisory services to its members. We conducted the fourth RAMP survey during high inflation, aggressive monetary policy tightening, extreme market volatility, geopolitical tensions, and a rapidly strengthening US dollar. As inflation increased after the COVID-19 pandemic, central banks worldwide pursued an aggressive monetary policy to fight inflation, raising rates to levels not seen since before the 2008 financial crisis. In this context, reserve management proved especially challenging as fixed-income portfolios took a hit from the sharp rise in interest rates in developed economies, where most portfolios are invested. Reserve managers had to adjust their operations and try to protect their portfolios. The timing of this survey allows us to identify whether the environment affected reserve management practices. Global foreign reserves dropped 9.3 percent in 2022,² the most significant reserve downturn in recent decades (Figure 1).³ Worldwide reserves shrank by US$1.4 trillion and were back to pre-pandemic levels. Sixty-two percent of all countries⁴ saw a decrease in their reserves, by an average of 12 percent (Figure 2). FIG U RE 1 . E VOLU T ION O F WO R LD’ S R E S E RVE S Source: Official Foreign Exchange Reserves (COFER) from International Monetary Fund (IMF), authors’ calculations. Note: The chart displays quarterly reserves data. Year-over-year changes refer to Q4 of a given year compared to Q4 of the previous year. The Inaugural RAMP survey was published in 2019. Ninety-nine central banks responded to our first survey, reflecting data from the fourth quarter of 2017. ¹ The second survey was published in 2020, containing information from 105 central banks with data from the fourth quarter of 2019. The third survey was published in 2021, with information from 119 central banks with data from the fourth quarter of 2021. ² Change in reserves between Q3 2021 and Q3 2022. ³ This was the largest drop in international reserves since 1982, according to IMF Data International Financial Statistics (IFS). ⁴ 97 out of a total of 156 countries with reserves data. INTR O DUCTIO N 6 Similarly, there was a 21 percent average drop in import coverage, from 6.2 months down to 4.8 months.⁵ In addition to interventions to support domestic currencies, valuation also played a role, with increases in interest rates. For example, the Bloomberg US Treasury Bond 1-3 Year Total Return Index decreased by 3.8 percent in 2022. FIG U RE 2 . C O U N T RIE S W I T H D E C LI N I N G R E S E RVE S I N 2 02 2 Source: COFER from IMF, authors’ calculations. Note: The map displays the countries with negative changes in reserves between 2022 and 2021 (annual data). In this difficult environment, reserve managers identified ESG, volatility, risk, and inflation as their main challenges in 2022 (Figure 3). Central banks faced numerous challenges in the aftermath of the COVID-19 pandemic. Not surprisingly, institutions struggled with inflation, higher interest rates, and market volatility. They were also concerned about keeping up with information technology and automation to capture and monitor risk properly. Furthermore, several central banks mentioned worrying over staff turnover and retention of technical expertise. Remarkably, central bankers continued to integrate ESG factors into their reserve management frameworks. The IMF’s assessment of reserve adequacy through their ratio of reserves as a percentage of their ARA metric (“Assessing Reserve Adequacy”) has also ⁵ estimated a worldwide decline in reserve adequacy in 2022, with an average of 7.8 percent. INTR O DUCTIO N 7 FIG U RE 3 . M A IN C H A L L E N G E S FAC E D BY R E S E RVE MAN AG E R S I N 2 02 2 Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks. Note: The above word cloud represents the main challenges reported by reserve managers in 2022 as part of the survey, where the size of each word corresponds to the frequency of its inclusion in the responses. In this survey, we aimed to capture the impact on reserve management of this challenging environment. The survey continues to expand our understanding of reserve management practices globally in areas critical for reserve management, such as governance, asset allocation, portfolio management, and risk management. This report also features two trending topics in reserve management: sustainable investing and information technology (IT). This report addresses three main areas: trends in reserve management, sustainable investing, and information technology. Section 4 presents the survey’s main results and examines significant trends, including changes from the previous surveys. Sections 5 and 6 describe issues relating to ESG and IT. Section 7 offers concluding observations and discusses the policy implications of the survey results. Finally, the Appendix provides information on the survey methodology and detailed results for the most relevant questions. 8 4. Trends in Reserve Management A. GOVERNANCE Investment objectives Most countries’ central banks have a three- investment committees. Of the institutions tier governance structure, with boards responding, 81 percent report that their approving the investment policy. The boards approve the investment policy, Revised Guidelines for Foreign Exchange including high-level decisions such as Reserve Management (International reserve management objectives, risk Monetary Fund 2014) suggests that central tolerance, investment horizon, and SAA bank boards should focus on making (Figure 4). This indicates limited delegation decisions of a strategic nature and delegate to the investment committees. decisions on strategy implementation to FIG U RE 4 . DE C ISION -M A KI N G B O D I E S AP P R OVI N G I N VE ST ME N T P O LI CY, T H E B E N C H M ARK , A N D T H E IN V E ST M E N T G UI D E LI N E S Benchmark Investment guidelines Investment policy Board 45% 48% 81% Governor 13% 15% 19% Head of Reserve Management 7% 11% 7% Investment Committee 45% 55% 25% Other 8% 7% 3% 0% 50% 100% 0% 50% 100% 0% 50% 100% Percentage of respondents N=124. Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks. Note: Results add up to more than 100 percent because respondents could choose more than one group for each function to reflect the complexity of governance arrangements in different countries. Investment committees have limited but the benchmark, as investment committees growing decision-making power. These now approve benchmarks in 45 percent of bodies only approve investment guidelines central banks, up from 27 percent in 2018. and benchmarks in approximately half of the institutions (55 and 45 percent, respectively). The investment committee is generally A considerable number of institutions comprised of senior officials that oversee maintain these decisions at the board level, reserve management (i.e., directors of but greater delegation seems to be the trend. foreign reserves, market operations, and The percentage of investment committees risk management). Figure 5 shows that that approve guidelines increased from 47 72 percent of central banks have the head percent in 2019 to 53 percent in 2023.⁶ The of foreign reserves on the committee, same appears to be true for the approval of followed by the director general or head of This percentage is different from the one displayed in Figure 4 (55 percent) as we only consider the set of central banks that responded to both surveys ⁶ when making comparisons. TR ENDS IN R E S E RV E M A NAG E M E NT: G OV E R N A N C E 9 market operations (61 percent), the deputy a third of institutions. By contrast, 51 percent governor (58 percent), and the head of of respondents have committee members risk management (55 percent). Despite its unfamiliar with investment management, importance in the reserve management such as the head of economic research process, the head of operations only and the head of monetary policy, which may participates in the investment committee in complicate decision-making. FIG U RE 5. M E M B E RS O F TH E I N VE ST ME N T C O MMI T T E E Head of Foreign Reserves 72% Director General/Head of Market Operations 61% Deputy Governor 58% Head of Risk Management 55% Governor 39% Head of Operations (i.e., back office) 33% Board members 24% We do not have an investment committee 4% 0% 50% 100% Percentage of respondents N=123. Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks. Note: Results add up to more than 100 percent because respondents could choose more than one option. The middle office is involved in designing units in charge of this process, usually at and proposing the SAA in almost three- institutions that manage more than US$50 quarters of central banks (Figure 6). The billion of reserves. Regardless of the front office supports the middle office in 31 arrangement, proper coordination between percent of institutions and is responsible the front and the middle office is essential to for the SAA in 24 percent of them. Very few robust SAA design and implementation. central banks (8 percent) have independent FIG U RE 6. U N IT RE SPON S I B LE F O R D E S I G N I N G AN D P R O P O S I N G T H E ST R AT E G I C AS S ET A L LOCAT IO N ( SA A ) 3% 9% 6% 31% Middle office, supported by the front office Middle office 8% Front office, supported by the middle office Unit independent from the front and middle offices Front office Other Not applicable 18% 24% N=123. Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks. Note: Percentages refer to percentage of respondents. TR ENDS IN R E S E RV E M A NAG E M E NT: G OV E R N A N C E 10 Organizational structure The survey results continue to show varying respondents have a front and middle office arrangements for the organizational in the same department and a back office structure of operational units (Figure 7). in a separate department. In most regions, Twenty-three percent of the central banks respondents are evenly divided between continue to place investment management the different organizational categories, (or front office), risk management (or middle except in the Middle East and Africa, where office), and operations (or back office) in most respondents (50 percent) combine all separate departments. Finally, 26 percent of three areas within the same department. FIG U RE 7. ORGA N IZ AT ION AL ST R U C T U R E F O R R E S E RVE MAN AG E ME N T 2% 2% 15% 2% 2% 15% 2% 15% 15% 2% 15% 15% Front and Front andback officesare backoffices areininthethesame department. samedepartment. Middle Middle office office isis ininaa separate separate dep depa 34% 34% and Front and Front and back offices are in the same department. Front Middle middle office back is in middle offices a separate offices are offices are in in are inthe the the same department same same department. department. department. Back Middle Back office office office isis is in inin aa a separate separate separate dep depa depa 34% 34% Front and Front back and offices middle are are offices in same in the department. the same department.Front, Middle Back Front Front, middle, office is is office and back in middle middle, and in anda offices separate aback offices separate offices back are in aredepartment in offices are department the same the are inseparate same in separate departments department. Middle department. Back office departments is in office is in a separate depa a separate depa 4% 34% Front and Front, middle middle, offices and back are in the offices same are department. in separate Front,and middle, Back departments Front Front, office is in middle middle, and and backoffices a offices separate back offices are are department in the are inseparate same in the the same same department department. Back office is in a separate depa departments department Front, middle, Front, and middle, back and backoffices officesare inin are separate the same Othermiddle, and back offices are in separate departments department Front, Other the same departments department Front, Other 26%are in the same department middle, and back offices 26% Front, Other middle, and back offices are in the same department 26% Other 26% Other 26% 26% 23% 23% 23% 23% N=123. 23% 23% Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks Note: Percentages refer to percentage of respondents.. Most central banks (60 percent) have the Unsurprisingly, central banks with larger middle office in the same department reserves have more staff for their reserve as the front office. This percentage has management activities (Figure 8). On not changed over time. An independent average, central banks have ten staff in risk management function improves risk the front office, eight in the middle office, identification, monitoring, and management; and eleven in the back office. The average however, complete organizational number of employees in the three units rises separation is not always possible in central from 13 for central banks with less than US$3 banks. Although investment and risk billion to 62 for central banks with over functions should be separated appropriately, US$50 billion of reserves. when the front and middle offices are in the same department, the institution requires detailed policies for the use of information and to resolve possible conflicts of interest (International Monetary Fund 2014). TR ENDS IN R E S E RV E M A NAG E M E NT: G OV E R N A N C E 11 FIG U RE 8 . N U M B E R O F STAF F S U P P O RT I N G R E S E RVE MAN AG E ME N T BY S I Z E OF THE RE SE RV E S ( U S$ , B IL L ION S ) Back office Middle office Front office Total 60 250 200 40 Number of staff Number of staff 150 20 100 50 0 0 0 200 400 600 0 200 400 600 0 200 400 600 0 200 400 600 Size of reserves (US$, billions) N=116. Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks. Note: Regression coefficients are highly statistically significant with a p-value lower than 0.0001. Summary statistics can be found in the Appendix (Table 10.1). Monetary unions are excluded. Regarding staff development, reserve (Figure 9). Respondents also mentioned the managers struggle most with a shortage of challenges they face with staff shortages, candidates for hiring, high staff turnover, work overload, and level of compensation and a lack of adequate training budgets and promotions vis-à-vis the private sector. FIG U RE 9. C H A L L E N G E S F O R STAF F D E VE LO P ME N T 100% Percentage of respondents 50% 50% 41% 29% 26% 6% 0% Shortage of High staff turnover Lack of budget for Limited support Other qualified training from senior candidates for management hiring N=107. Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks. Note: Results add up to more than 100 percent because respondents could choose more than one option. Central banks in lower-middle- and low- Staff turnover was especially problematic income countries struggle more than their for upper-middle- and high-income counterparts to train staff and develop countries. While the shortage of qualified technical expertise (Figure 10). Some 47 candidates is a challenge faced by almost percent of these central banks report that half of central banks of all income levels, staff the lack of budget for training is a significant turnover was higher in upper-middle- and challenge, compared with 19 percent in high-income countries than in lower-middle- upper-middle-income countries and 18 and low-income countries. Countries in the percent in high-income countries. This issue former category are more likely to face was also relevant among central banks with competition with the private sector for talent. smaller reserve portfolios. TR ENDS IN R E S E RV E M A NAG E M E NT: G OV E R N A N C E 12 FIG U RE 1 0. C H A L L E N G E S F O R STAF F D E VE LO P ME N T BY C O U N T RY I N C O ME G R O U P Lower middle and low income Upper middle income High income Shortage of qualified candidates for hiring 50% 55% 47% High staff turnover 26% 58% 42% Lack of budget for training 47% 19% 18% Limited support from senior management 3% 13% 0% 50% 100% 0% 50% 100% 0% 50% 100% Percentage of respondents N=107. Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks. Note: Percentages refer to percentage of respondents within each group. Results add up to more than 100 percent because respondents could choose more than one option. Reporting and transparency Most central banks report duration metrics 89 and 63 percent of respondents report to the board and the investment committee duration and VaR, respectively, less than for oversight of reserve management half report currency deviations from the activity, but they rarely report other benchmark (48 percent) and TE (46 percent). standard risk measures (Figure 11). While FIG U RE 1 1 . RISK M E ASU R E S R E P O RT E D TO T H E B OAR D O R T H E I N VE ST ME N T C O MM ITTEE 100% 89% Percentage of respondents 63% 48% 50% 46% 41% 20% 18% 4% 0% Duration VaR Currency TE CVaR Probability of Other Not applicable deviations from negative returns the benchmark N=122. Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks. Note: Results add up to more than 100 percent because respondents could choose more than one option. Although most institutions produce internal asset allocations (39 percent). However, reports, disclosing extensive information central banks did not generally share with on reserve management activities to the the public the main guiding principles of the public was unusual (Figure 12). The only data investment policy or granular information on that most central banks (60 percent) revealed reserve management practices. Fewer than was the currency composition of reserves. a quarter of central banks disclosed their A significant proportion also published investment policies, guidelines, risk metrics, information on eligible asset classes (48 or characteristics of external management percent), performance (39 percent), and programs. TR ENDS IN R E S E RV E M A NAG E M E NT: G OV E R N A N C E 13 FIG U RE 1 2 . IN FO RM AT ION D I S C LO S E D TO T H E P U B LI C , E I T H E R O N A MAN DATO RY OR A VO LU N TA RY B ASIS 100% 16% 26% 25% 25% 24% 39% 39% 48% Percentage of respondents 60% Yes 50% 47% No 74% 62% 64% Not applicable 66% 52% Left unanswered 56% 46% 34% 24% 6% 5% 4% 5% 6% 0% 4% 4% 4% Currency Eligible asset Performance Asset External Investment Investment Risk metrics Portfolio composition classes allocations managers horizon policies and benchmarks guidelines N=122. Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks. The transparency of the central bank they disclose 3.5 and 2.4 metrics on average, increases in line with the country’s income respectively). We also find that respondents and the size of the reserves (Figure 13). in the Americas, the Caribbean, Europe, and Respondents in high-income countries Central Asia disclose more information to disclose more data (3.7 metrics on average) the public than those from other regions (i.e., than respondents in lower-middle- and low- 4.5 and 3.6 metrics on average compared income countries (1.9 metrics on average). to 1.8 and 1.9 in the Middle East, Africa, and Similarly, central banks with reserves above South and East Asia and the Pacific). The US$50 billion are more transparent than differences in national rules on disclosure those with reserves below US$3 billion (i.e., may explain this observation. FIG U RE 1 3 . AV E RAG E N U MB E R O F ME T R I C S D I S C LO S E D TO T H E P U B LI C BY G E O G R APHIC RE G IO N , C O U N T RY IN C OM E , AN D S I Z E O F T H E R E S E RVE S (U S $ , B I LLI O N S ) Geographic region Country income Size of reserves (US$, billions) 5 4.5 Average number of metrics publicly 4 3.7 3.6 3.5 3.4 3.2 2.9 3 disclosed 2.4 2 1.8 1.9 1.9 1 0 Americas & Europe & Middle East South & Lower Upper High Less than 3 to 10 10 to 50 More than Caribbean Central Asia & Africa East Asia & middle and middle income 3 billion billion billion 50 billion Pacific low income income N=122. Source: World Bank country and lending groups (World Bank 2023), 2023 RAMP Survey on the Reserve Management Practices of Central Banks. TR ENDS IN R E S E RV E M A NAG E M E NT: ST RAT EG I C ASSE T A L LOCAT I ON ( SA A ) 14 B . S T R AT E G I C A S S E T A L LO C AT I O N ( S A A ) Tranching Tranching reserve portfolios is a common allocation process. Throughout our four practice among central banks. Seventy- surveys, only thirteen respondents reported three percent of the respondents use tranches changing their approach; eight reported no to split their reserve portfolios. Central banks longer using tranches, while five reported can address different objectives by dividing adopting the practice. Both positions can the reserve portfolio into tranches, such as be supported with strong arguments. A working capital, liquidity, and investment. tranching framework may make it easier for The different tranches will have distinct central banks to achieve and communicate liquidity needs and risk tolerance levels. objectives linked to specific portfolio Central banks do not usually change their tranches. But not having tranches avoids a tranching policies, as it is one of the first and mental accounting bias, guaranteeing more most influential steps in the strategic asset efficient portfolios. FIG U RE 1 4 . T RA N C H IN G 27% 27% Yes No Yes No 73% 73% N=123. Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks. Note: Percentages refer to percentage of respondents. Summary statistics by geographic region, income country level, and size of the reserves can be found in the Appendix (Table 10.3). While most central banks use a tranching contrast, central banks less likely to have framework, the specific approach varies significant short-term liquidity needs (i.e., substantially across central banks (Figure reserves above US$50 billion, located in 15). Most institutions with reserves lower Europe or other high-income countries, and than US$10 billion in the Middle East, Africa, with floating exchange rate regimes) were the Americas, and the Caribbean, and less likely to tranche their reserve portfolios, those in upper-middle-, lower-middle-, and which may explain why their portfolios carry low-income countries used tranching. By more risk.⁷ Central banks without tranches have a longer average investment horizon (43 versus 26 months in central banks with tranches), a slightly higher average ⁷ duration (27 versus 26 months), and a higher average allocation to nontraditional asset classes (20 percent versus 9 percent). TR ENDS IN R E S E RV E M A NAG E M E NT: ST RAT EG I C ASSE T A L LOCAT I ON ( SA A ) 15 FIG U RE 1 5. T RA N C H IN G BY G E O G R AP H I C R E G I O N , C O U N T RY I N C O ME G R O U P, AN D S IZE O F T H E RE SE RV E S ( U S$ , B I LLI O N S ) Geographic region Country income Size of reserves (US$) 100% Percentage of respondents within group 56% 51% 56% 67% 71% 80% 82% Yes 88% 88% 86% 94% No 50% 44% 49% 44% 33% 29% 20% 18% 12% 12% 14% 0% Americas & Europe & Middle East South & Lower Upper High Less than 3 to 10 10 to 50 More than Caribbean Central & Africa East Asia & middle and middle income 3 billion billion billion 50 billion Asia Pacific low income income N=123. Source: World Bank country and lending groups (World Bank 2023), 2023 RAMP Survey on the Reserve Management Practices of Central Banks. Note: Percentages refer to percentage of respondents within each group. Summary statistics by geographic region, income country level, and size of the reserves can be found in the Appendix (Table 10.3). Our survey results indicate that the average, for 44 percent of total reserves. investment tranche accounts for the largest In contrast, the liquidity and working capital share of reserves, followed by the liquidity tranches accounted for an average of 39 and working capital tranches (Figure 16). and 19 percent, respectively. The investment tranche accounted, on FIG U RE 1 6. T RA N C H E A L LO CAT I O N S I N R E S E RVE P O RT F O LI O S 50 Average allocation to each tranche (percent) 43.9 40 38.9 30 20 21.6 18.9 10 0 Working capital Liquidity tranche Investment tranche Other tranche Respondents with 51 74 72 37 allocation N=81. Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks. Note: We excluded observations where the total sum of the individual tranches was either below 85% or above 115%. Summary statistics can be found in the Appendix (Table 10.4). TR ENDS IN R E S E RV E M A NAG E M E NT: ST RAT EG I C ASSE T A L LOCAT I ON ( SA A ) 16 Central banks determine the size of the 77 percent of respondents using them. The tranches based on reserve adequacy second and third most common metrics metrics.⁸ When the level of reserves is are import coverage (i.e., reserves divided adequate, central banks are expected to by monthly imports) and the ratio of short- focus investment tranches more on returns term debt (i.e., maturing in less than twelve than on liquidity and safety. Figure 17 shows months) to reserves. Only 26 percent of the most common reserve adequacy respondents use the IMF’s ARA metric,⁹ measures. Short-term liquidity measures, the most comprehensive reserve adequacy such as potential foreign exchange metric. interventions, are the most common, with FIG U RE 1 7. M E T RIC S U SED TO S E T T R AN C H E S 100% 77% Percentage of respondents 51% 50% 50% 26% 18% 10% 0% Short-term liquidity Months of imports Short-term external IMF's ARA metric Broad money Other needs debt N=82. Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks. Note: Results add up to more than 100 percent because respondents could choose more than one option. Nonetheless, figure 18 shows that central measures. This is a consequence of having banks tend to use more than one metric more than one tranche, since each tranche when setting the size of the tranches. Sixty- might have multiple purposes. Additionally, two percent of respondents use more than seven respondents do not take the ARA one metric. There is a significant intersection metric from the IMF but estimate it according between the individual metrics and the other to their macroeconomic conditions. ⁸ According to Heller (1966), there are three motives for holding international reserves: transactional, speculative, or precautionary. Empirical results (for example, Aizenman 2007) support precautionary (versus mercantilist) motives. In this case, reserves play the role of self-insurance against sudden stops in capital flows. Jeanne and Rancière (2011) develop a model of the optimal level of international reserves for a small open economy. The model focuses on the benefits of holding reserves for crisis mitigation and to reduce the probability of sudden stops and is consistent with the average level of reserves in emerging market countries since 1980, with the exception of Asia since 1998. The IMF developed the ARA (Assessing Reserve Adequacy) metric in 2011 to assess reserve adequacy based on the country’s characteristics and vulnerabilities. ⁹ The IMF’s ARA metric is a measure of risks reflecting potential drains on the balance of payments; it combines various metrics, including short-term external debt, broad money, exports, and other portfolio liabilities. TR ENDS IN R E S E RV E M A NAG E M E NT: ST RAT EG I C ASSE T A L LOCAT I ON ( SA A ) 17 FIG U RE 1 8 . T H E IN T E RSE C T I O N AMO N G T H E ME T R I C S U S E D TO S E T T R AN C H E S N=82. Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks. Note: Percentages outside the intersection represent the number of respondents that use the metric individually. Percentages in the intersection represent the number of respondents that use the metric in conjunction with other metrics. The data suggest that reserve adequacy reserve adequacy metrics that respondents plays an essential role in the decision use in their SAA analysis. Very few central to have an investment tranche and its banks with insufficient reserves¹⁰ have participation in the SAA. Figure 19 shows investment tranches. The participation of the relationship between the reported the investment tranche also increases with allocation to the investment tranche and the better reserve adequacy measures. FIG U RE 1 9. RE L AT IO N B E T W E E N T H E ALLO CAT I O N TO T H E I N VE ST ME N T T R AN C H E AN D M E T RIC S U SE D TO SE T T R AN C H E S 80 Allocation to investment tranche (%) 60 40 20 0 0.8 1.0 1.2 1.4 1.6 1.8 Reserves to ARA metric (unit) 80 investment tranche (%) Reserves below the ARA metric, less than three months of import coverage, or short-term debt that exceeds the level reserves. ¹⁰  60 40 Alloca 0 RAT EG I1.0 0.8 TR ENDS IN R E S E RV E M A NAG E M E NT: ST 1.2 C ASSE T A 1.4 ( SA A ) 1.6 L LOCAT I ON 1.8 18 Reserves to ARA metric (unit) 80 Allocation to investment tranche (%) 60 40 20 0 0 2 4 6 8 10 Import cover (months) 80 Allocation to investment tranche (%) 60 40 20 0 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 Reserves to external short-term debt (unit) Source: IMF’s World Economic Outlook, World Bank’s World Development Indicators, and 2023 RAMP Survey on the Reserve Management Practices of Central Banks. Note: Regression coefficients are highly statistically significant with a p-value lower than 0.0001. We excluded observations where the total sum of the allocations to the individual tranches was either below 85% or above 115%. Monetary unions are excluded TR ENDS IN R E S E RV E M A NAG E M E NT: ST RAT EG I C ASSE T A L LOCAT I ON ( SA A ) 19 Risk tolerance More than half of the respondents use a The preferred risk tolerance metric for high- VaR¹¹ metric to define the risk tolerance income and upper-middle-income countries of their reserve portfolios. Forty-one was VaR, while lower-middle- and low- percent of institutions used CVaR,¹² and income countries preferred the probability 34 percent of respondents deployed the of negative returns. By region, central probability of negative returns¹³ to state the banks in South and East Asia and the Pacific risk tolerance of their reserve management preferred the probability of negative returns, operations (Figure 20). Roughly 39 percent while other regions preferred VaR. of respondents use more than one metric. FIG U RE 2 0. M E T RIC TO D E F I N E R I S K TO LE R AN C E I N T H E SAA F R AME WO R K 100% 20% 34% Percentage of respondents 41% 52% Yes 50% No 80% 66% 59% 48% 0% VaR CVaR Probability of Other negative returns N=115. Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks. Central banks are moving away from the as it is not a coherent risk measure,¹⁴ and probability of negative returns to define the may result in an underrepresentation of risk tolerance of their reserve portfolios in risk. Additionally, the probability of negative favor of metrics like CVaR (Figure 21). Forty returns is not appropriate when interest percent of the central banks that no longer rates are negative,¹⁵ as in several developed use the probability of negative returns shifted countries before 2021. By contrast, VaR to CVaR, 27 percent to VaR, 27 percent to and CVaR measure the expected loss and a combination of measures, and the rest to consider extreme events, while CVaR is also other metrics. A likely explanation is that the a coherent risk measure. probability of negative returns does not fully capture the potential losses from tail events, ¹¹ VaR measures the worst expected return of the portfolio over a predefined probability and time horizon. ¹² CVaR, also known as expected shortfall, measures the average expected return if the worst-case threshold (i.e., measured by VaR) is ever crossed. ¹³ Setting a probability of negative returns at 5 percent is equivalent to a VaR of zero percent with 95 percent confidence. Artzner et al. (1999) introduced the concept of a coherent risk measure with desirable properties for a risk measure. A coherent risk measure satisfies four ¹⁴  axioms: translation invariance, subadditivity, positive homogeneity, and monotonicity. In a negative yield environment, fixed-income securities usually display higher volatility than their expected returns or, equivalently, a return-to-risk ratio ¹⁵  below one. In such cases, the probability of negative returns manifests erratically. If the return-to-risk ratio is between zero and one, the probability of negative returns is almost flat for increasing levels of risk. If the return-to-risk ratio is equal to zero, the probability of negative returns is always 50 percent. If the return-to-risk ratio is negative, the probability of negative returns decreases as the risk increases. TR ENDS IN R E S E RV E M A NAG E M E NT: ST RAT EG I C ASSE T A L LOCAT I ON ( SA A ) 20 FIG U RE 2 1 . C H A N G E IN TH E U S E O F ME T R I C S TO D E F I N E R I S K TO LE R AN C E I N T HE SAA FRA M E WORK C OM PA RE D TO T H E 2 02 1 S U RVE Y 15% Percentage of respondents 10% 8% 5% 0% -5% -4% -4% -9% -10% CVaR VaR Probability of Other negative returns N=97. Source: 2021 and 2023 RAMP Surveys on the Reserve Management Practices of Central Banks. Our survey results show that the central tend to set -1 percent as the worst possible banks are conservative when setting return with a confidence level of 95 percent. the risk tolerance metric level. Figure 22 However, several respondents set the worst depicts the levels central banks use for the possible return as 0 percent, with 95 and probability of negative returns, VaR, and 99 percent confidence levels (i.e., this is CVaR when defining the risk tolerance in equivalent to a probability of negative returns the SAA. The most common level for those of 5 percent and 1 percent, respectively). choosing the probability of negative returns Finally, for those selecting CVaR, most is a 5 percent probability over a one-year central banks choose an average loss of 1 horizon. Still, a significant amount selects percent in the worst 5 percent of outcomes. more conservative levels (i.e., a probability This is a more conservative measure than of 1 and 0 percent of not having negative a VaR with the same value and confidence returns). The central banks that choose VaR level, since CVaR averages all tail events. FIG U RE 2 2 . VA LU E S O F T H E ME T R I C S TO D E F I N E R I S K TO LE R AN C E I N T H E SAA F R AMEWORK Probability of negative returns Percentage of respondents 100% 54% 50% 32% 11% 4% 0% 0% 1% 5% 10% Value of the metric TR ENDS IN R E S E RV E M A NAG E M E NT: ST RAT EG I C ASSE T A L LOCAT I ON ( SA A ) 21 VaR Confidence Level 95 % 99% 0% -5% -10% Value of the metric N=14. CVaR Confidence Level 95% 99% 0% -5% -10% Value of the metric N=16. N=28, 14, 16, respectively. Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks. Note: The size of each circle corresponds to the percentage of respondents that use the value of the metric. TR ENDS IN R E S E RV E M A NAG E M E NT: ST RAT EG I C ASSE T A L LOCAT I ON ( SA A ) 22 Investment horizon The risk embedded in the SAA is a function returns.¹⁶ Survey respondents reported an of the selected risk tolerance metric, its level, average investment horizon of 44 months and the investment horizon. As expected, for their investment tranche, compared to 17 central banks that use a tranching framework months for the liquidity tranche and 2 months have a substantially longer investment for working capital (Figure 23). Central banks horizon in the investment tranche than in that do not tranche their portfolios report an the liquidity portfolio. Reserve managers average investment horizon of 43 months, assign a different investment objective to indicating a higher total risk tolerance. the investment tranche—to pursue higher FIG U RE 2 3 . IN V E ST M E N T H O R I ZO N BY T R AN C H E 95% 100% 100% Working 50% 50% capital tranche 5% 0% 0% 100% 100% Percentage of respondents within group 61% Liquidity 50% 50% tranche 19% 9% 6% 3% 3% 0% 0% 100% 100% Investment tranche 50% 41% 50% 17% 17% 12% 7% 3% 3% 0% 0% 100% 100% Total portfolio 50% 50% (untranched) 32% 24% 20% 8% 8% 4% 4% 0% 0% Shorter than 12 12 months Between 12 and 36 months Between 36 and 60 months Longer than 60 months 36 months 60 months months N=40, 70, 69, 25, respectively. Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks. Note: The “total portfolio (untranched)” category applies to respondents that do not use a tranching methodology. We excluded observations where the total sum of the individual tranches was either below 85% or above 115%. Summary statistics by geographic region, income country level, and size of the reserves can be found in the Appendix (Table 10.5). Siegel (2008) argues that a longer investment horizon goes hand in hand with an increasing ability to take risk and increase expected returns. ¹⁶  TR ENDS IN R E S E RV E M A NAG E M E NT: ST RAT EG I C ASSE T A L LOCAT I ON ( SA A ) 23 Duration In line with their conservative risk tolerance, was 29 months. Central banks without central banks report low duration in their tranches have a 27-month average duration. tranches and consolidated portfolios. For Institutions in high-income countries are the liquidity tranche, the average duration likelier to have higher durations in the stood at 10 months at the end of 2022. The different tranches and total portfolios. average duration for the investment tranche FIG U RE 2 4 . DU RAT IO N OF T H E D I F F E R E N T T R AN C H E S 95% 100% Working 50% capital tranche 5% 0% 100% 66% Percentage of respondents within group Liquidity 50% tranche 16% 3% 4% 6% 6% 0% 100% Investment tranche 41% 50% 28% 17% 10% 3% 1% 0% 100% Total portfolio 44% 50% (untranched) 28% 24% 4% 0% Shorter than 8 Between 8 and 16 Between 16 and 24 Between 24 and Between 32 and Longer than 40 months months months 32 months 40 months months N=19, 63, 65, 29, respectively. Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks. Note: The “total portfolio (untranched)” category applies to respondents that do not use a tranching methodology . We excluded observations where the total sum of the individual tranches was either below 85% or above 115%. Summary statistics by geographic region, income country level, and size of the reserves can be found in the Appendix (Table 10.6). Fifty-five percent of central banks reported experienced in 2022 were at the fastest reducing duration in 2022 in response pace and most considerable scale in two to rising rates and high inflation (Figure decades. Expecting further rate increases, 25). Only 9 percent reported increasing central banks may have reduced their the portfolio duration, while 29 percent duration to avoid possible mark-to-market reported no changes. The interest rate hikes losses. TR ENDS IN R E S E RV E M A NAG E M E NT: ST RAT EG I C ASSE T A L LOCAT I ON ( SA A ) 24 FIG U RE 2 5. M E ASU RE S TAKE N I N 2 02 2 I N R E S P O N S E TO T H E R I S I N G R AT E S AN D HIGH IN FL AT ION E N V IRO N M E N T 100% 14% 10% 13% 9% 19% Percentage of respondents 37% 20% 55% 37% 49% 57% 56% 50% Decrease 69% Increase 52% 68% No change 41% 30% Not applicable 29% 22% 21% Left unanswered 0% 8% 9% 9% Portfolio Portfolio Eligible asset Allocation to Allocation to Allocation to Allocation to Other duration diversification classes gold inflation- floating rate externally indexed notes (FRNs) managed instruments portfolios N=116. Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks. Compared to 2021, however, the duration month. Institutions without tranches reduced changes were not substantial (Figure 26). portfolio duration most, although these The reported tranches and total portfolio central banks were more likely to have a durations are lower than in the 2021 survey, higher duration in the first place. but the average reduction is around one FIG U RE 2 6. C H A N G E S IN D U R AT I O N C O MPAR E D TO T H E 2 02 1 S U RVE Y Source: 2021 and 2023 RAMP Surveys on the Reserve Management Practices of Central Banks. Note: Distribution of the changes in duration by tranche. The “Total (untranched)” category applies to respondents that do not use a tranching methodology. We excluded observations where the total sum of the individual tranches was either below 85% or above 115%. TR ENDS IN R E S E RV E M A NAG E M E NT: ST RAT EG I C ASSE T A L LOCAT I ON ( SA A ) 25 Currency composition of reserves The US dollar remains dominant, with the Currencies in the special drawing rights euro a distant second. The participation (SDR) basket have higher eligibility in of other currencies is growing, but it is still reserve portfolios. The US dollar is eligible reasonably small. The dollar is eligible in in almost all institutions (98 percent). Eighty- almost all central banks, and other traditional eight percent can invest in the euro, 76 reserve currencies are eligible in at least percent in the British pound, 68 percent half of the respondents’ portfolios. On the in the Japanese yen, and 64 percent in other hand, the survey data regarding the the Chinese renminbi. The Australian and currency composition of assets is consistent Canadian dollars are next in line: they are with the latest figures in the IMF´s Currency eligible in 58 and 57 percent of central Composition of Official Reserves (COFER).¹⁷ banks, respectively (Figure 27). The average Notwithstanding this, the role of the US number of eligible currencies in central dollar has diminished since the late 1990s banks is eight; the median is seven. (Arslanalp, Eichengreen, and Simpson-Bell 2022),¹⁸ but at a gradual pace. FIG U RE 2 7. C U RRE N CY E L I G I B I LI T Y 100% 98% 88% 76% Percentage of respondents 68% 64% 58% 57% 50% 43% 34% 34% 33% 33% 28% 22% 18% 13% 12% 7% 6% 6% 5% 4% 0% USD EUR GBP JPY CNY AUD CAD CHF NOK SEK NZD DKK KRW SGD HKD ZAR MXN INR RUB TRY BRL Other N=120. Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks. Note: Summary statistics by geographic region, income country level, and size of the reserves can be found in the Appendix (Table 10.7). There are differences in eligibility by acceptance of the Chinese renminbi, the region. Central banks in the Americas Japanese yen, the Australian dollar, the and the Caribbean have fewer eligible New Zealand dollar, and other currencies currencies, while institutions in South and in the region. Some European currencies East Asia and the Pacific have the most also have broad eligibility in South and East extensive currency eligibility, with wider Asian and Pacific countries. From the first quarter of 2023. Available at https://data.imf.org/?sk=e6a5f467-c14b-4aa8-9f6d-5a09ec4e62a4. ¹⁷  ¹⁸ The dollar’s share declined from around 71 percent of total central bank allocated reserves in 1999 to around 59 percent in 2021. TR ENDS IN R E S E RV E M A NAG E M E NT: ST RAT EG I C ASSE T A L LOCAT I ON ( SA A ) 26 Institutions that manage bigger pools of Central banks have not materially changed reserves or are in countries with higher eligible currencies since our 2021 survey incomes can invest in a broader set of (Figure 28). Only a few countries made currencies. This is the case when we adjustments to currency eligibility over compare institutions that manage more than the past two years. The eligibility to the US$50 billion in reserves with those having US dollar and the Japanese yen remained less than US$3 billion in reserves. A similar unchanged. The eligibility to the Chinese trend is observed in central banks with renminbi increased by 4 percentage points, intermediate levels of reserves. Similarly, while currencies like the British pound or the high-income countries have more eligible euro saw a decrease in eligibility (by 3 and 1 currencies than lower-middle and low- percentage points, respectively) income countries. FIG U RE 2 8 . C H A N G E S IN C U R R E N CY E LI G I B I LI T Y C O MPAR E D TO T H E 2 02 1 S U RVE Y 6% 4% 4% Percentage point difference 4% 2% 0% 0% 0% 0% 0% -1% -2% -3% -4% -6% CNY JPY USD EUR GBP CNY CNY JPY JPY USD USD EUR EUR GBP GBP CNY JPY USD N=101. Source: 2021 and 2023 RAMP Surveys on the Reserve Management Practices of Central Banks. Note: For simplicity, we display changes in eligibility to SDR currencies only. Regarding allocation, reserves are primarily (2 percent each) and the Australian dollar invested in the US dollar and the euro. (1.8 percent). Since many countries are not On average, 62.6 percent of reserves are exposed to some currencies, median values invested in the US dollar and 22.1 percent are much smaller than averages. The only in the euro. Exposure to other currencies is exception is the US dollar, where more than smaller, with the Chinese renminbi being the 97 percent of respondents report exposure third most invested currency, at 2.4 percent. (Figure 29). Currencies following in importance include the British pound and the Japanese yen TR ENDS IN R E S E RV E M A NAG E M E NT: ST RAT EG I C ASSE T A L LOCAT I ON ( SA A ) 27 FIG U RE 2 9. AV E RAG E AC TUAL ALLO CAT I O N TO E AC H C U R R E N CY 80 62.6 Average allocation (percent) 60 40 22.1 20 8.6 2.4 2.0 2.0 0 USD EUR CNY GBP JPY Other Number of respondents 107 80 57 57 37 65 with exposure N=110. Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks. Note: We excluded observations where the total sum of the individual allocations was either below 85% or above 115%. For simplicity, we display allocations to SDR currencies only. Considering only the central banks exposed significant increases in average exposure to each currency, the US dollar and the euro can be seen in currencies in which fewer maintain relevance, but average levels in countries invest. For the Japanese yen, the other currencies increase. The average Australian dollar, and the Canadian dollar, exposure to the Chinese renminbi and the average exposure increases to 5.8, 5.7, and British pound almost doubled to 4.6 and 3.9 percent, respectively. Around a third of 3.8 percent, respectively. About half of the the countries surveyed have exposure to central banks that responded to the survey these currencies (Figure 30). have exposure to them. However, more FIG U RE 30. AV E RAG E AC T UAL ALLO CAT I O N TO E AC H C U R R E N CY F O R R E S P O N DEN TS W IT H E X POSU RE 80 64.3 Average allocation (percent) 60 40 30.4 16.5 20 4.6 5.8 3.8 0 USD EUR CNY GBP JPY Other Number of respondents 107 80 57 57 37 65 with exposure N=110. Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks. Note: We excluded observations where the total sum of the individual allocations was either below 85% or above 115%. For simplicity, we display allocations to SDR currencies only. TR ENDS IN R E S E RV E M A NAG E M E NT: ST RAT EG I C ASSE T A L LOCAT I ON ( SA A ) 28 Breaking down the currency composition exposure to the Japanese yen and the by region and income levels shows some Canadian dollar. Countries in South and East noticeable patterns. Central banks in Asia and the Pacific have greater exposure the Americas and the Caribbean have an to currencies in that region, including the average exposure of 87.7 percent to US Chinese renminbi; the Australian, New dollars, more than twice that of Europe and Zealand, and Singaporean dollar; and the Central Asia (42.6 percent). Other regions Korean won. Analyzing the data by income have exposure to US dollars closer to the group, countries in the lower-middle- and global average of 62.6 percent. Europe low-income groups have the highest and Central Asia, on the other hand, have exposure to the US dollar and the Chinese much higher exposure to the euro, with 42.7 renminbi. Countries in the upper-middle- percent versus the global average of 22.1 and high-income categories have more percent; that region also has the highest exposure to other currencies (Figure 31). FIG U RE 31 . AV E RAG E AC T UAL ALLO CAT I O N TO E AC H C U R R E N CY BY G E O G RAPHIC RE G IO N , C O U N T RY IN C OM E G R O U P, AN D S I Z E O F T H E R E S E RVE S (U S $ , B I LLI O N S ) Geographic region Country income Size of reserves (US$) 100% Average actual currency allocation 43% 60% 57% 55% 66% 64% 62% 68% 71% 68% USD within group EUR 88% JPY 50% GBP CNY 43% Other currencies 5% 27% 31% 17% 17% 27% 19% 13% 21% 4% 19% 14% 0% 7% 10% 10% 10% 7% 10% 3% 5% 5% Americas & Europe & Middle East South & Lower Upper High Less than 3 3 to 10 10 to 50 More than Caribbean Central & Africa East Asia & middle and middle income billion billion billion 50 billion Asia Pacific low income income N=110. Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks. Note: Percentages refer to percentage of respondents within each group. For simplicity, we display allocations to SDR currencies only. We excluded observations where the total sum of the individual allocations was either below 85% or above 115%. Compared with the 2021 survey, the respectively. Meanwhile, the exposure to most significant changes are a higher the euro diminished by 2 percentage points, exposure to the US dollar and the Chinese possibly driven by the very low interest renminbi and a smaller exposure to the rates in the Eurozone. All other changes in euro (Figure 32).¹⁹ The global exposure the composition range between -0.8 and 0 to the US dollar and the Chinese renminbi percent. increased by 3.3 and 0.6 percentage points, This comparison is done by matching only countries that responded to both surveys. ¹⁹  TR ENDS IN R E S E RV E M A NAG E M E NT: ST RAT EG I C ASSE T A L LOCAT I ON ( SA A ) 29 FIG U RE 3 2 . C H A N G E S IN C U R R E N CY ALLO CAT I O N C O MPAR E D TO T H E 2 02 1 S U RVEY 4% 4% 3.3% 3.3% Percentage point difference Percentage point difference 2% 2% 0.6% 0.6% 0% 0% -0.1% -0.2% -0.1% -0.2% -2% -2% -2.0% -2.0% -4% -4% USD CNY GBP JPY EUR USD USD CNY CNY GBP GBP JPYJPY EUREUR USD CNY GBP JPY EUR N=91. Source: 2021 and 2023 RAMP Surveys on the Reserve Management Practices of Central Banks. Note: For simplicity, we display changes in allocations to SDR currencies only. Numeraire The US dollar is the most frequently used East and Africa more regularly deployed the numeraire for reporting purposes, followed US dollar as numeraire (i.e., 88 and 79 percent by the domestic currency (Figure 33). of respondents, respectively). European and Over 60 percent of central banks reported Central Asian central banks used either the performance in US dollars and 49 percent domestic currency (72 percent) or the euro in local currency. Using the SDR or another (63 percent).²⁰ Institutions in South and East currency basket was unusual. A breakdown Asia and the Pacific used the US dollar (67 by region shows that countries in the percent) and the domestic currency (62 Americas and the Caribbean and the Middle percent). FIG U RE 3 3. C U RRE N C IE S U S E D AS A N U ME R AI R E F O R P E R F O R MAN C E R E P O RT I N G 100% Percentage of respondents 63% 49% 50% 28% 5% 7% 2% 0% USD Domestic EUR Currency SDR Other Basket N=123. Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks. ²⁰ Countries in the Eurozone use their domestic currency as their numeraire. TR ENDS IN R E S E RV E M A NAG E M E NT: ST RAT EG I C ASSE T A L LOCAT I ON ( SA A ) 30 The numeraire has an impact on the respectively). Likewise, central banks using strategic currency selection of central a euro numeraire have a higher allocation to banks (Figure 34). The institutions that euros, on average (i.e., 50 percent versus 8 reported using a US dollar numeraire have and 32 percent among the institutions with a higher US dollar allocation (78 percent) a US dollar numeraire and local currency, compared to those using their local respectively). currency or the euro (48 and 38 percent, FIG U RE 3 4 . AV E RAG E A L LO CAT I O N TO U S D O LLAR S AN D E U R O S BY T H E N U ME R AI RE Allocation to USD Allocation to EUR 100% Average allocation under each numeraire 78% 58% 60% (percent) 52% 50% 48% 50% 38% 32% 29% 15% 8% 0% 1% USD Domestic EUR Currency SDR Other USD Domestic EUR Currency SDR Other Basket Basket N=84 Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks. Eligible asset classes Central banks tend to favor asset classes from developed markets, and 89 percent with high liquidity and low risk, which can invest in money market instruments or aligns with their capital preservation and SSA securities. Eighty-seven percent can liquidity objectives. For this survey, we invest in bank deposits, 73 percent in gold, classify all traditional asset classes deemed and only half of central banks are eligible to eligible by more than 50 percent of the invest in inflation-indexed bonds. respondent central banks. As we can see from Figure 35, 95 percent of central banks are eligible to invest in government bonds TR ENDS IN R E S E RV E M A NAG E M E NT: ST RAT EG I C ASSE T A L LOCAT I ON ( SA A ) 31 FIG U RE 3 5. ASSE T C L ASS E LI G I B I LI T Y Government bonds 95% Money market instruments 89% SSA 89% Bank deposits 87% Gold 73% Inflation-indexed bonds 50% IG corporate bonds 49% Covered bonds 46% EM bonds 36% MBS 35% ABS 22% DM equity 22% EM equity 8% HY corporate bonds 6% CBDCs 1% Other 21% 0% 50% 100% Percentage of respondents N=121. Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks. Note: ABS = asset-backed securities; CBDCs = central bank digital currency; DM = developed markets; EM = emerging markets; HY = high yield; IG = investment grade; MBS = mortgage-backed securities; SSA = sovereign, supranational, and agency bonds. Summary statistics by geographic region, income country level, and size of the reserves can be found in the Appendix (Table 10.8). Nontraditional asset classes are appealing have become a trendy topic in the financial for their diversification benefits, and media, remain a very niche asset class; only 1 investment-grade corporate bonds are percent of central banks have it as an eligible the preferred asset class in this category. asset class. We categorize nontraditional asset classes as those eligible for less than half of the Central banks in Europe and Central Asia respondents. While nontraditional asset invest more frequently in nontraditional classes are typically riskier on a stand-alone asset classes than do those in other regions basis, they also tend to offer higher expected (Figure 36). However, in this specific case returns and increase portfolio diversification of ABS and MBS tend to be less frequently (Hentov et al. 2019). The preferred eligible in Europe and Central Asia. We also nontraditional asset class is investment-grade observe that inflation-indexed bonds and corporate bonds (49 percent of respondents), MBS have significantly higher eligibility in followed by covered bonds (46 percent), the Americas and Caribbean region. Finally, emerging market bonds (36 percent), almost half (42 percent) of high-income mortgage-backed securities (MBS) (35 countries can invest in developed equities, percent), and asset-backed securities (ABS) compared with 8 percent in the remaining (22 percent). Investing in equities remains countries. On the other hand, bank deposits rare for central banks, as only 22 percent of are significantly less eligible among high- institutions can invest in developed market income countries (i.e., 74 percent versus equities and only 8 percent in emerging 95 percent to 97 percent for the remaining market equities. Digital currencies, which countries). TR ENDS IN R E S E RV E M A NAG E M E NT: ST RAT EG I C ASSE T A L LOCAT I ON ( SA A ) 32 FIG U RE 36. E L IG IB IL IT Y TO N O N T R AD I T I O N AL AS S E T C LAS S E S BY G E O G R AP H I C R EGION , C O U N T RY IN C OM E G ROUP, AN D S I Z E O F T H E R E S E RVE S N=121. Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks. Note: We categorize nontraditional asset classes as those eligible for less than half of the respondents. We define the eligibility to nontraditional asset classes if the respondent reported at least one nontraditional asset class as eligible. Summary statistics can be found in the Appendix (Table 10.8). Compared to our 2021 survey, 9 percent high inflation environment (Figure 25). Some of central banks have decided to add of the traditional assets saw an increase investment-grade corporate bonds to their in eligibility, including money market list of eligible asset classes, reflecting a instruments (3 percent), government bonds continued appetite for diversification while (2 percent), and SSA bonds (1 percent). But trying to control the level of risk (Figure deposits, inflation-linked bonds, and gold 37). Nineteen percent of respondents cited experienced a decline in eligibility, with a increasing the eligible assets pool as a decrease of 3 percent for the first two and 4 response to the increasing interest rates and percent for gold. FIG U RE 3 7. C H A N G E S IN AS S E T C LAS S E LI G I B I LI T Y C O MPAR E D TO T H E 2 02 1 S U RVEY 10% 9% 6% Percentage point difference 5% 4% 3% 3% 3% 2% 1% 1% 1% 0% -1% -2% -3% -3% -4% -5% Inflation- IG EM bonds ABS DM equity HY Money Government EM equity SSA Covered MBS Bank Inflation- Gold Other corporate corporate market bonds bonds deposits indexed bonds bonds instruments bonds N=101. Source: 2021 and 2023 RAMP Surveys on the Reserve Management Practices of Central Banks. Note: ABS = asset-backed securities; DM = developed markets; EM = emerging markets; HY = high yield; IG = investment grade; MBS = mortgage-backed securities; SSA = sovereign, supranational, and agency bonds. TR ENDS IN R E S E RV E M A NAG E M E NT: ST RAT EG I C ASSE T A L LOCAT I ON ( SA A ) 33 Asset allocation Our survey results show that traditional nontraditional asset classes in reserve asset classes, such as government bonds portfolios, these asset classes still only from developed markets, bank deposits, make up a small portion of reserve money market instruments, SSA securities, portfolios, with an average allocation of and gold, have the highest allocation in 13.6 percent across all respondent banks. reserve portfolios. The average allocations On average, reserve managers held about to developed government bonds and 77.7 percent of their reserve in four asset bank deposits were the highest (35 and classes: government bonds (34.7 percent), 20 percent, respectively). For the other bank deposits (20 percent), money market traditional asset classes, central banks have instruments (13 percent), and SSA securities an average exposure of 13 percent to money (10 percent). Gold had an average allocation markets instruments, 10 percent to SSA and of 7.3 percent, whereas inflation-indexed 7.3 percent to gold. However, allocations to bonds are the traditional asset class with the deposits and gold differ significantly across lowest average allocation (only 1.3 percent). survey respondents because there is a In terms of nontraditional asset classes, significant difference between the median investment-grade corporate bonds have the and the average (Figure 38). highest average allocation across central banks (2.5 percent), followed by developed Despite the increasing endeavors market equities (1.5 percent) and emerging of central banks globally to include market bonds (1.4 percent). FIG U RE 3 8 . AV E RAG E AC TUAL ALLO CAT I O N TO E AC H AS S E T C LAS S F O R R E S P O N D EN TS 50 40 34.7 Average allocation (percent) 30 20.0 20 13.0 10.0 10 7.3 5.3 2.5 1.5 1.4 1.2 0.9 1.3 0.5 0.1 0.1 0.1 0 Government SSA Bank Money Gold IG EM bonds MBS Covered DM equity Inflation- EM equity ABS HY CBDCs Other bonds deposits market corporate bonds indexed corporate instruments bonds bonds bonds Number of respondents 93 79 73 69 52 35 29 22 19 19 18 4 3 3 1 29 with exposure N=104. Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks. Note: ABS = asset-backed securities; CBDCs = central bank digital currency; DM = developed markets; EM = emerging markets; HY = high yield; IG = investment grade; MBS = mortgage-backed securities; SSA = sovereign, supranational, and agency bonds. We excluded observations where the total sum of the individual allocations was either below 85% or above 115%. TR ENDS IN R E S E RV E M A NAG E M E NT: ST RAT EG I C ASSE T A L LOCAT I ON ( SA A ) 34 Furthermore, the allocation to nontraditional In most cases, the average allocation to asset classes is very low, even for nontraditional asset classes remains below respondents with exposure, limiting the 10 percent, except for ABS (i.e., 15 percent potential for diversification. Figure 39 shows among the three respondents investing in the reported asset allocations of respondents’ ABS) and digital currencies. The nontraditional portfolios. It presents only data for institutions asset class in which more central banks invest that indicated exposure to a specific asset is investment-grade corporates (35 central class (i.e., it does not reflect the impact of banks). central banks that did not report an allocation). FIG U RE 3 9. AV E RAG E AC T UAL ALLO CAT I O N TO E AC H AS S E T C LAS S F O R R E S P O N D EN TS W IT H E X POSU RE 50 40 37.3 Average allocation (percent) 30 27.3 18.8 18.4 20 14.0 15.0 14.0 12.6 7.3 8.1 7.1 10 4.9 5.4 4.9 3.3 2.0 0 Government SSA Bank Money Gold IG EM bonds MBS Covered DM equity Inflation- EM equity ABS HY CBDCs Other bonds deposits market corporate bonds indexed corporate instruments bonds bonds bonds Number of respondents 93 79 73 69 52 35 29 22 19 19 18 4 3 3 1 29 with exposure N=104. Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks. Note: ABS = asset-backed securities; CBDCs = central bank digital currency; DM = developed markets; EM = emerging markets; HY = high yield; IG = investment grade; MBS = mortgage-backed securities; SSA = sovereign, supranational, and agency bonds. We excluded observations where the total sum of the individual allocations was either below 85% or above 115%. Comparing to our 2021 survey, we observe government bonds from developed that, on average, institutions have shifted markets, and inflation-indexed bonds have the makeup of their traditional assets increased by 2.1, 1.4, and 0.6 percentage toward more money market instruments, points, respectively. government bonds from developed markets, and inflation-indexed bonds, while The high inflation environment may reducing their allocation to SSA securities. explain changes in asset allocation. Central As shown in Figure 40, central banks have banks may have increased their allocation marginally altered the composition of their to inflation-indexed bonds to hedge against nontraditional assets, as the most significant high inflation. Lower portfolio duration shift concerns emerging market bonds, with and high short-term rates may explain the a slight increase of 0.3 percent points. The increase in money market instruments. average shares of money market products, TR ENDS IN R E S E RV E M A NAG E M E NT: ST RAT EG I C ASSE T A L LOCAT I ON ( SA A ) 35 FIG U RE 4 0. C H A N G E S IN AS S E T ALLO CAT I O N C O MPAR E D TO T H E 2 02 1 S U RVE Y 4% Average percentage point difference 2.1% 2% 1.4% 0.6% 0.3% 0.3% 0.1% 0.1% 0.0% 0% 0.0% -0.1% -0.2% -0.3% -0.5% -0.9% -2% -2.8% -4% Money Government Inflation- EM bonds DM equity EM equity MBS Bank HY ABS IG Covered Gold SSA Other market bonds indexed deposits corporate corporate bonds instruments bonds bonds bonds N=77. Source: 2021 and 2023 RAMP Surveys on the Reserve Management Practices of Central Banks. Note: ABS = asset-backed securities; DM = developed markets; EM = emerging markets; HY = high yield; IG = investment grade; MBS = mortgage-backed securities; SSA = sovereign, supranational, and agency bonds. We excluded observations where the total sum of the individual allocations was either below 85% or above 115%. The decrease in gold allocation observed in the survey is not consistent with the overall observed increase of gold holdings during the period 2021-2022 (World Gold Council data). This is because our survey sample does not include some of the countries that increased their gold holdings most significantly. The analysis of asset allocations of reserve probably due to the legacy of negative portfolios by reserve level, region, and rates in Europe at the beginning of 2022. income group reveals several notable On the other hand, countries in the South patterns (Figure 41). As discussed above, and East Asia and Pacific have the smallest central banks hold an average allocation average allocation to government bonds of 34.7 percent in government bonds. (24.5 percent) and gold (2.8 percent) and the They also have an average allocation of largest average allocation to bank deposits 20 percent in bank deposits, 10 percent in (30.4 percent), money market instruments SSA bonds, and 13 percent in money market (21.6 percent), and inflation-indexed bonds instruments. Nonetheless, these average (1.6 percent). allocations notably change when comparing reserve portfolios across regions. By income level, central banks of high- income countries invest the most in Central banks in Europe and Central nontraditional asset classes, with an Asia have the largest allocation to average allocation of 21.7 percent. In turn, nontraditional assets (16.5 percent). At lower-middle- and low-income and upper- the same time, institutions in the Middle middle-income countries present significantly East and Africa region invest the most lower allocations to nontraditional asset on average in traditional asset classes classes, with a 9.4 percent and 8.4 percent (i.e., 91 percent versus only 9 percent in allocation on average. Regarding the nontraditional asset classes). Europe and specific asset classes, high-income central Central Asia respondents have relatively banks have reserve portfolios concentrated larger allocations to government bonds (39.3 in government bonds (39.3 percent), with a percent) and gold (11.9 percent). Nonetheless, small position in bank deposits (6 percent). exposures to bank deposits, money market, By contrast, lower-middle- and low-income and inflation-indexed products were lower, countries have similar allocations to TR ENDS IN R E S E RV E M A NAG E M E NT: ST RAT EG I C ASSE T A L LOCAT I ON ( SA A ) 36 government bonds and bank deposits (32.1 rather large allocation to bank deposits (30 percent versus 31.7 percent, respectively). percent), indicating a less sophisticated Finally, we observe that developed market investment framework. At the same time, equities and gold are primarily present in institutions with more than US$50 billion the allocations of high-income countries (3.7 of reserves have a higher share of their percent versus 9.5 percent, respectively). reserves invested in government bonds (46 percent) and only limited exposure to Comparing the composition of reserve deposits (7 percent), which may be the portfolios across the absolute size of the result of the difficulties that tend to arise reserves, we find that central banks that when investing large portfolios in less liquid manage less than US$3 billion have a instruments. FIG U RE 4 1 . AV E RAG E AC T UAL ALLO CAT I O N TO E AC H AS S E T C LAS S BY G E O G R APHIC RE G IO N , C O U N T RY IN C OM E G R O U P, AN D S I Z E O F T H E R E S E RVE S Geographic region Country income Size of reserves (US$) 100% 24% Average actual allocation within group 33% 32% 32% 29% 29% 35% 37% 39% 39% 46% 6% 9% 11% Government bonds 7% 9% 15% SSA 14% 10% 9% 30% 9% Bank deposits 50% 9% 11% 32% 6% 30% 24% Money market instruments 29% 16% 17% 25% 7% Gold 13% 12% 10% Inflation-indexed bonds 7% 12% 22% 9% 20% Nontraditional asset classes 12% 12% 13% 15% 7% 13% 15% 4% 7% 3% 6% 3% 4% 6% 22% 20% 16% 16% 12% 14% 9% 9% 8% 10% 12% 0% Americas & Europe & Middle East & South & East Lower Upper High Less than 3 3 to 10 billion 10 to 50 More than 50 Caribbean Central Asia Africa Asia & Pacific middle and middle income billion billion billion low income income N=100. Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks. Note: ABS = asset-backed securities; CBDCs = central bank digital currency; DM = developed markets; EM = emerging markets; HY = high yield; IG= investment grade; MBS = mortgage-backed securities; SSA = sovereign, supranational, and agency bonds. We excluded observations where the total sum of the individual allocations was either below 85% or above 115%. C. PORTFOLIO MANAGEMENT Active management Most respondents actively managed at least management or enhanced indexing for their one of their portfolios (almost 80 percent).²¹ liquidity portfolio, increasing to 73 percent For institutions that deploy a tranching for the investment tranche. Although most framework, the investment style deployed respondents still actively managed at least by institutions varies by tranche (Figure 42). one of their portfolios, the survey found that As the investment horizon increases, central there has been a small shift toward a buy- banks appear to have a higher tolerance and-hold strategy to deal with the difficult for active risk in their portfolios. We find market downturn in 2022. that 58 percent of respondents use active By “actively,” we mean that the respondents use “active” management or “enhanced indexation” in at least one of the tranches or in the portfolio as a ²¹  whole. Without a benchmark, portfolio managers often buy securities and hold them until they mature. For institutions with a consistent SAA framework, the choice is typically between passive and active management. Passively managed portfolios attempt to replicate the composition of the benchmark. Actively managed portfolios, in contrast, deviate from the benchmark in pursuit of a higher return. An active investment strategy will always be more resource-intensive than a passive strategy because it requires investment management skills in both the portfolio and the risk management teams. However, central banks can deploy various strategies for active management. An arguably less intensive and more risk-averse approach is an enhanced indexing strategy that permits only limited deviations from the benchmark. TR ENDS IN R E S E RV E M A NAG E M E NT: PO RT FOL I O M A N AG E M E N T 37 FIG U RE 4 2 . PORT FO L IO MAN AG E ME N T ST Y LE BY T R AN C H E Working capital Liquidity tranche Investment tranche Total portfolio (untranched) Buy and hold 37% 21% 35% 34% Passive 46% 33% 21% 31% Enhanced 12% 27% 33% 19% indexing Active 12% 31% 40% 63% 0% 50% 100% 0% 50% 100% 0% 50% 100% 0% 50% 100% Percentage of respondents N=41, N=78, N=84, and N=32, respectively. Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks. Note: Results add up to more than 100 percent because respondents could choose more than one investment style used per tranche or for the portfolio as a whole. The “total portfolio (untranched)” category applies to respondents that do not use a tranching methodology. Most central banks use an active 100 basis points (Figure 43), whereas 28 management style, but many do not have percent utilized limits above 100 basis points. a separate risk metric to limit active risk- We find that central banks in high-income taking.²² Only 43 percent of institutions countries set higher TE limits on average with active risk use tracking error (TE) limits than other countries.²³ Similarly, we find that to manage their active risk-taking. Almost TE limits seem to increase in line with the three-quarters of respondents reporting allocation to nontraditional asset classes from these institutions had TE limits below and the number of derivatives used.²⁴ FIG U RE 4 3 . M A X IM U M T E F O R AC T I VE LY MAN AG E D P O RT F O LI O S O R P O RT F O LI O S THAT A PPLY E N H A N C E D IN DE X I N G 20% 28% 100 basis points and above 51-99 basis points 31-50 basis points 10-30 basis points 12% 40% N=25. Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks. Note: Percentages refer to percentage of respondents. Sample filtered for respondents with active risk (i.e., that make use of enhanced indexation or active management strategies in at least one of their tranches) and which allocate TE systematically (i.e., risk budgeting) compared to 121 of the full sample. The survey asked about the maximum tracking error (TE) or active risk central banks deploy for active management. TE is the standard deviation of ²²  expected returns relative to the benchmark. It is one of the most common metrics used to assess the level of active risk in a portfolio. TE limits are a good indicator of the extent of active risk-taking. Forty percent of central banks in high-income countries have TE limits above 100 bps compared to ten percent among low- and lower-middle-income ²³  countries and 20 percent among upper-middle-income countries. Central banks that use TE limits above 100 bps have a 20 percent allocation to nontraditional asset classes and use four different types of derivatives. ²⁴  This contrasts with a 14 percent allocation to nontraditional asset classes and 1.6 types of derivatives, on average, among central banks with TE limits below 30 bps. TR ENDS IN R E S E RV E M A NAG E M E NT: PO RT FOL I O M A N AG E M E N T 38 Reserve managers did not take much Nonetheless, two deviations from the active currency risk by deviating from their strategic currency allocations stood out. benchmark currency composition (Figure Central banks allocated an average of 1 and 44). Generally, most central banks tended 0.4 percentage points above the benchmark to keep the currency composition of their weight to the US dollar and the Chinese portfolios close to their benchmarks,²⁵ with renminbi, respectively. a trivial dispersion for most participants. FIG U RE 4 4 . C U RRE N CY D E VI AT I O N S F R O M T H E B E N C H MAR K 2% Average percentage point difference 1.0% 0.4% 0.3% 0.2% 0% -0.2% -2% USD EUR CNY GBP JPY Number of 43 36 27 20 20 respondents N=82. Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks. Note: We define currency deviation as the difference between the strategic allocation (i.e., the benchmark) and the actual allocation for each currency. Hence, the distribution for each currency is based on the total number of respondents answering both the strategic and the actual currency allocations questions. For simplicity, we display currency deviations for SDR currencies only. Regarding active deviations from the above the benchmark)²⁶ and underweight in strategic asset allocation, reserve SSA securities (i.e., 4.1 percent points below managers took significant positions away the benchmark). The latter may be driven from their strategic asset allocation weights by a heightened focus on liquidity and the (Figure 45). On average, reserve managers expectation of spread widening. revealed considerable overweight positions in government bonds (i.e., 8.7 percent points The median difference between the portfolio and the benchmark for all currencies is 0 percent. ²⁵  All respondents’ median overallocation to government bonds amounted to 5 percent, indicating that many central banks hold these overweight positions. ²⁶  TR ENDS IN R E S E RV E M A NAG E M E NT: PO RT FOL I O M A N AG E M E N T 39 FIG U RE 4 5. ASSE T C L ASS D E VI AT I O N S F R O M T H E B E N C H MAR K 10% 8.7% Average percentage point difference 5% 0.3% 0.0% 0.0% 0.0% 0% -0.2% 0.0% -0.9% -0.6% -0.6% -0.6% -1.8% -2.8% -2.5% -5% -4.1% -10% Government SSA Bank Money IG EM bonds Covered MBS Inflation- DM equity ABS EM equity CBDCs HY Other bonds deposits market corporate bonds indexed corporate instruments bonds bonds bonds Number of 54 48 47 41 19 15 14 10 9 5 4 1 0 0 13 respondents N=65. Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks. Note: We define asset deviation as the difference between the strategic allocation (i.e., the benchmark) and the actual asset allocation for each asset. Hence, the distribution for each asset is based on the total number of respondents answering both the strategic and actual asset allocations questions. We did not register any deviations from the benchmark for CBDCs and high-yield corporate bonds, so these are excluded from the chart. Despite the widespread use of active active investment management strategies investment management styles and and deviate significantly from their strategic strategies, active risk budgeting is still currency and asset composition. Central limited among central banks.²⁷ Only 27 banks’ limited adoption of active risk percent of organizations that took active risk budgeting strategies may be explained systematically allocated TE across active by insufficient resources and skillsets to strategies or asset classes.²⁸ An active design a proper risk budgeting allocation risk budgeting methodology becomes framework. particularly important when institutions use Derivatives, investment instruments, and investment strategies Our survey found that central banks that consider using at least one derivative deployed a limited number of derivatives,²⁹ has not increased (35 percent), the number investment instruments, and investment and different types of derivatives under strategies,³⁰ but many are considering consideration has increased (from 2.7 to using them (Figure 46). Half of the 3.4, on average). Additionally, while more respondents use derivatives in some form, than half of institutions have authorized with half of central banks using foreign repurchase agreements and securities exchange forwards and swaps. We find lending, ETF adoption is still low (18 percent). that, although the number of central banks Risk budgeting compares active strategies using a similar metric (TE) to find an efficient active risk allocation. Best practice in investment management ²⁷  holds that reserve managers should build a robust risk budgeting framework to deploy active risk efficiently. When comparing the same subset of central banks for the 2021 and 2023 surveys, although we notice that the percentage of institutions using active risk ²⁸  budgeting has increased from 23 percent to 30 percent only, it remains a small percentage. Derivatives allow investors to hedge risks, facilitate the implementation of new asset classes, or even increase expected returns by giving more flexibility ²⁹  to portfolio managers. These properties are particularly beneficial for more complex portfolios. Investment instruments like exchange traded funds (ETFs) simplify access to nontraditional asset classes at a low cost, while repos and securities lending ³⁰  allow institutions to generate additional returns. TR ENDS IN R E S E RV E M A NAG E M E NT: PO RT FOL I O M A N AG E M E N T 40 Some central banks do not necessarily use, on average, more than three types of trade derivatives or use these instruments derivatives and two kinds of investment frequently or considerably, even if they are strategies compared to roughly one among authorized. Other central banks may not lower-middle- and low-income countries. have adopted them because they may not Central banks with reserve portfolios above be permitted to use them. Even when these US$50 billion use, on average, four types instruments are not prohibited, institutions of derivatives and two types of investment may lack complex legal documentation, instruments, compared to one among dealer capacity, or a proper accounting central banks with less than US$3 billion framework. in assets. Similarly, on average, central banks in Europe, Central Asia, South and Our survey found that the use of derivatives East Asia and the Pacific use more of these and investment strategies increases in line instruments (roughly three derivatives) than with the country’s income level and the other regions (less than two). size of the reserves. High-income countries FIG U RE 4 6. U SE O F DE R I VAT I VE S , I N VE ST ME N T I N ST R U ME N TS , AN D I N VE STM EN T ST RAT E G IE S 100% 7% 7% 5% 5% 4% 4% 5% 5% 10% 10% 3% 18% 18% 5% 4% 7% 6% 7% 9% 5% 12% 6% 45% Percentage of respondents 52% 48% 14% 54% 53% 16% 64% 63% 61% 59% 60% 59% 50% 57% 53% 12% 18% 51% 11% 11% 49% 87% 14% 37% 20% 20% 21% 24% 15% 24% 23% 23% 24% 24% 24% 26% 20% 22% 21% 15% 14% 17% 12% 10% 10% 0% Repos FX swaps Securities FX IR futures ETFs IR swaps Gold FX options Currency IR options Currency Asset CDS Gold Inflation Other lending forwards swaps futures options swaps options swaps Yes Under consideration No, authorized but appropriate legal No, not authorized Left unanswered agreements are not in place (e.g. ISDAs) N=110. Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks. Note: CDS = credit default swap; ETF = exchange traded fund; FX = foreign exchange; IR = interest rate; repo = repurchase agreement. External Management Although central banks continue to hire reserves externally managed. On average, external managers, these tend to manage central banks allocate 16 percent of their only a small portion of reserve assets. We reserves to external managers. Fifty-one observe that 77 percent of respondents use percent of central banks with external external managers, 73 percent of which managers allocate less than ten percent of have fewer than five external managers their reserve assets, while only 19 percent (Figure 47).³¹ At the same time, there is of respondents delegate more than 30 significant dispersion in the share of the percent.³² ³¹ We did not find any significant change in the use of external managers since our 2021 survey. There are significant differences in the average number of external managers by geographic region, country income group, and size of the reserves ³²  (US$ billion). Central banks in high-income countries use, on average 5.4 external managers, which is double the number of external managers used by central banks in lower-middle- and low-income countries. By region, central banks in the South and East Asia and Pacific have on average 9.3 external managers, thrice the number in Middle East and Africa. Also, respondents with higher reserve levels are more likely to have many more managers: central banks with more than US$50 billion in reserves have about four times more external managers, compared to those with less than US$3 billion. TR ENDS IN R E S E RV E M A NAG E M E NT: PO RT FOL I O M A N AG E M E N T 41 FIG U RE 4 7. D IST RIB U T IO N O F T H E N U MB E R O F E X T E R N AL MAN AG E R S AN D S H A RE OF RE SE RV E S E X T E RN A L LY M AN AG E D 100% 100% 73% Percentage of respondents 51% 50% 50% 21% 16% 13% 11% 5% 3% 1% 1% 1% 1% 1% 1% 0% 0% 0 10 20 30 40 50 0 10 20 30 40 50 60 70 80 90 Number of external managers Share of reserves externally managed (percent) N=79. Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks. FIG U RE 4 8 . SH A RE O F RE S E RVE S E X T E R N ALLY MAN AG E D BY T H E N U MB E R O F E X T ERN AL M A N AG E RS 100% Share of reserves externally managed Size of reserves ($US) Less than 3 billion 50% 3 to 10 billion 10 to 50 billion More than 50 billion 0% 0 10 20 30 40 50 Number of external managers N=76. Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks. Central banks leverage external managers asset class, such as MBS (26 percent), to invest in nontraditional asset classes investment-grade corporate bonds (17 (Figure 49). Almost 48 percent of the percent), or developed-markets equity (14 respondents authorize external managers percent). only to invest in at least one nontraditional TR ENDS IN R E S E RV E M A NAG E M E NT: PO RT FOL I O M A N AG E M E N T 42 FIG U RE 4 9. ASSE T C L ASS E S P E R MI T T E D BY E X T E R N AL MAN AG E R S 100% 5% 4% 1% 5% 12% 5% 6% 1% 19% 18% 18% 27% 14% 18% 40% Percentage of respondents 6% 10% 64% 26% 71% 17% Permitted for internal 81% 78% 58% 63% 62% and external managers 88% 9% 46% 58% Permitted for external 50% 46% managers only Not applicable 36% 38% 76% 32% Left unanswered 8% 14% 14% 4% 5% 6% 28% 31% 28% 31% 5% 26% 23% 19% 21% 18% 6% 15% 14% 10% 10% 0% 5% Government SSA Money Bank Inflation- Covered IG EM bonds MBS ABS Gold DM equity EM equity HY Other bonds market deposits indexed bonds corporate corporate instruments bonds bonds bonds Permitted for internal and Permitted for external Not applicable Left unanswered external manager managers only N=78. Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks. Note: ABS = asset-backed securities; CBDCs = central bank digital currency; DM = developed markets; EM = emerging markets; HY = high yield; IG = investment grade; MBS = mortgage-backed securities; SSA = sovereign, supranational, and agency bonds. External managers manage diverse asset two nontraditional asset classes. The number classes (Figure 50), a mix of traditional and of nontraditional asset classes that external nontraditional asset classes. Central banks managers invest in is higher among central reported that external managers used, on banks with larger reserve portfolios.³⁴ average, six traditional asset classes³³ and FIG U RE 50. ASSE T C L ASS E S U S E D BY E X T E R N AL MAN AG E R S 100% 9% 8% 6% 1% 6% 23% 20% 26% 45% 44% 43% Percentage of respondents 59% 64% 81% 78% 90% Yes 50% 99% No 91% 93% 94% 94% 78% 80% 74% 55% 56% 58% 41% 36% 19% 23% 0% 10% Governme SSA Money Inflation- Bank IG Covered MBS ABS EM bonds DM equity EM equity HY Gold CBDCs Other nt bonds market indexed deposits corporate bonds corporate instruments bonds bonds bonds N=80. Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks. Note: ABS = asset-backed securities; CBDCs = central bank digital currency; DM = developed markets; EM = emerging markets; HY = high yield; IG = investment grade; MBS = mortgage-backed securities; SSA = sovereign, supranational, and agency bonds. Interestingly, external managers used most of the asset classes that they were permitted to use, as they were allowed to invest in 6.5 asset classes on ³³  average. Central banks with reserves above US$50 billion use external managers to invest in three nontraditional asset classes, on average, compared to two ³⁴  among all other central banks. TR ENDS IN R E S E RV E M A NAG E M E NT: FI NA NC I A L R I SK M A N AG E M E N T 43 D. FINANCIAL RISK MANAGEMENT Credit risk management Central banks manage credit risk mainly by Most participants had minimum ratings in investing in debt securities with high credit the investment-grade category (i.e., BBB+/ ratings (Figure 51). Credit risk is especially BBB/BBB- or above), mainly in line with their concerning for central banks because investment objective of safety and liquidity. defaults may impact the bank’s reputation. FIG U RE 51 . M IN IM U M C R E D I T R AT I N G F O R E LI G I B LE I S S U E R S I N T H E AS S E T C LAS S ES L IST E D Government bonds SSA Commercial banks Corporate bonds Covered bonds AAA 1% 4% 1% 6% AA+/AA/AA- 14% 17% 8% 8% 10% A+/A/A- 42% 45% 48% 23% 16% BBB+/BBB/BBB- 37% 26% 27% 19% 14% BB+ and below 3% 1% 2% 2% Not applicable 3% 4% 13% 41% 42% 0% 50% 100% 0% 50% 100% 0% 50% 100% 0% 50% 100% 0% 50% 100% Percentage of respondents N=118. Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks. Note: SSA= sovereign, supranational, and agency bonds. Central banks in high-income countries Compared to our 2021 survey, most and with large reserve portfolios display central banks kept their minimum credit a higher tolerance for corporate credit ratings unchanged for most asset classes. risk. Fifty-three percent of respondents with However, some loosened their ratings reserves above US$50 billion use BBB+/ for government bonds, SSA bonds, BBB/BBB- minimum credit ratings, compared commercial bank deposits, and corporate to 18 percent among central banks with bonds (Figure 52). Notably, 16 percent of reserves below US$3 billion. Similarly, 48 central banks reduced their minimum ratings percent of central banks in high-income for government bonds, 14 percent for SSA countries use BBB+/BBB/BBB- minimum bonds, 11 percent for commercial banks, and credit ratings compared to 25 percent of 8 percent for corporate bonds, typically by central banks in lower-middle and low- one notch. income countries. TR ENDS IN R E S E RV E M A NAG E M E NT: FI NA NC I A L R I SK M A N AG E M E N T 44 FIG U RE 52 . PE RC E N TAG E O F C E N T R AL B AN KS W I T H C H AN G E S I N C R E D I T R AT I N G S F ROM T H E 2 0 2 1 SU RV E Y 100% 30% 53% Percentage of respondents 72% 71% 8% No change 10% Tightened 50% Loosened 8% New limit 11% No more limit Not applicable 9% 8% 20% 39% 14% 16% 0% 8% Government bonds SSA Corporate bonds Commercial banks N=102. Source: 2021 and 2023 RAMP Surveys on the Reserve Management Practices of Central Banks. Note: SSA = sovereign, supranational, and agency bonds. Rating agencies remain the primary significantly, central banks are increasingly source of information on credit risk (Figure combining usual sources of information 53). Almost all central banks used credit with more sophisticated risk assessment ratings in their risk management process. methodologies. Fundamental credit analysis Nonetheless, many central banks also use (e.g., debt or equity, interest coverage) and other methodologies like market indicators sophisticated quantitative models provided and internal models to complement their by third parties are becoming more common research process (i.e., 75 percent of as complementary tools.³⁶ respondents use at least one other source of credit risk).³⁵ For central banks with The number of credit risk assessment minimum credit ratings of BBB+/BBB/BBB- methodologies used increases with the , market indicators play a more critical role size of the reserves. On average, central (68 percent). banks with reserves above US$50 billion use three different types of method, Although the use of methodologies for compared to two among central banks with credit risk analysis has not changed less than US$3 billion. This is also the case for respondents that invested in corporate bonds specifically, as they do not rely exclusively on credit ratings, but rather opt instead ³⁵  to complement them with other methodologies. ³⁶ The use of fundamental credit analysis and quantitative models has increased from 33 and 16 percent, to 40 and 21 percent, respectively. TR ENDS IN R E S E RV E M A NAG E M E NT: FI NA NC I A L R I SK M A N AG E M E N T 45 FIG U RE 53 . C RE DIT RIS K AS S E S S ME N T ME T H O D O LO G I E S U S E D F O R I S S U E R S AN D C O U N T E RPA RT IE S 100% 94% Percentage of respondents 53% 50% 46% 40% 19% 0% Credit ratings Market indicators Internal model Fundamental Quantitative from rating that combines credit analysis models provided agencies some of the by third parties indicators above N=123. Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks. Note: Results add up to more than 100 percent because respondents could choose more than one option. Several central banks that take credit Most institutions that produce credit risk risk in various portfolios do not produce metrics (58 percent) use an in-house or aggregate credit risk measures. Only 48 custom credit risk model. Models relying percent of respondents use a portfolio on the Basel II or Basel III methodologies or credit risk model to calculate expected and those provided by vendors are not frequently unexpected loss, credit value at risk (VaR), used, with 29 percent of central banks using expected credit shortfall, or conditional a model similar to Basel III and 20 percent credit value at risk (credit CVaR). Credit using vendor models (Figure 54). However, risk models are most often used among compared to our 2021 survey, institutions central banks in Europe and Central Asia have regressed in the use of in-house (60 percent), in high-income countries (52 risk models. The share of central banks percent), or with larger reserve portfolios deploying that methodology decreased (i.e., 55 percent among respondents with from 74 to 58 percent. The complexity of reserves above US$3 billion compared to 31 maintaining these models, coupled with staff percent among respondents with reserves turnover, may explain their declining use. below US$3 billion).³⁷ ³⁷ Weighted average for all sizes of reserves above US$3 billion. TR ENDS IN R E S E RV E M A NAG E M E NT: FI NA NC I A L R I SK M A N AG E M E N T 46 FIG U RE 54 . C RE D IT RISK MO D E L U S E D 100% Percentage of respondents 58% 50% 29% 20% 8% 0% In-house or custom Basel II/III model Vendor credit risk Other credit risk model models N=59. Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks. Note: Results add up to more than 100 percent because respondents could choose more than one option. Market risk management Central banks use multiple metrics to that VaR and CVaR limits are appropriate manage market risk in their reserve tools to manage the risks embedded in management operations.³⁸ The majority these asset classes. Although these limits of institutions (82 percent) manage interest- are often included in the SAA process, rate risk by setting limits on portfolio duration it is remarkable that less than half of the (Figure 55). respondents (43 percent)⁴⁰ with diversified portfolios have adopted these types of Most central banks with multicurrency probabilistic risk tools to measure and limit portfolios did not have limits on the the overall market risk at the individual and maximum currency deviation from the total reserve portfolios. We find that central benchmark to manage their tactical banks in high-income countries with larger currency risk (57 percent). While they reserve portfolios use more of these limits, could manage the currency risk through on average, than others. quantitative risk measures such as a VaR or TE limits, only 26 percent of central banks Comparing our 2023 survey results with multiple currency exposures do so. with those of 2021, we do not find any For central banks with a diversified asset significant changes despite central banks’ composition, capturing the risk of these efforts to build more diversified asset portfolios beyond simple duration limits is portfolios, suggesting that there continues highly desirable.³⁹ Best practice suggests to be room for improvement. Market risk refers to the risk of losses arising from movements in market prices. Similarly, duration risk refers to the sensitivity of fixed income instruments ³⁸  prices to changes in yields. As most reserve portfolios are concentrated in high-grade fixed-income instruments, duration is an essential market risk measure. Although central banks do not deviate significantly from the currency composition of the benchmark (less than 1 percent on average for all currencies), we ³⁹  find that 61 percent of respondents deviate from their currency composition for at least one of the currencies. Probabilistic risk limits are critical for central banks to consider because of the various market risks embedded in their reserve portfolios. For example, instruments with embedded options such as MBS, ABS, and callable bonds are exposed to volatility and spread changes that simple duration limits cannot capture. ⁴⁰ This number refers to the percentage of central banks that invest in more than one asset class that makes use of VaR or CVaR limits. TR ENDS IN R E S E RV E M A NAG E M E NT: FI NA NC I A L R I SK M A N AG E M E N T 47 FIG U RE 55. L IM ITS U SE D TO MAN AG E MAR KE T R I S K 100% 82% Percentage of respondents 50% 44% 44% 29% 29% 20% 5% 0% Duration Maximum Sector limits TE limit VaR limit CVaR limit Not Limit currency applicable deviations from the benchmark N=98. Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks. Note: Sample filtered for respondents with multiple-currency portfolios, compared to 122 respondents of the full sample. Results add up to more than 100 percent because respondents could choose more than one option. Liquidity risk management Almost 40 percent of the respondents thresholds of liquid assets are the most neither measure nor monitor liquidity risk frequent mechanisms used to manage in their day-to-day activities.⁴¹ This large liquidity risk. In addition, respondents percentage of central banks is especially reported using metrics such as bid-ask surprising given that one of the core spreads, liquidity coverage ratios, expected objectives of reserve management is to shortfall (i.e., liquidity CVaR), and third-party ensure foreign currency liquidity. Tranching, liquidity scores to quantify liquidity risk. cash-flow forecasting, and minimum Liquidity risk refers to difficulties meeting financial obligations at a reasonable cost as they come due. ⁴¹  48 5. Sustainable Investing (ESG) Climate change and its effect on the Our survey shows that ESG investing is global economy have raised central banks’ gaining traction in reserve management. awareness of its relevance to financial Out of 119 institutions, more than one-third stability, supervision, monetary policy, and of respondents integrated ESG aspects public asset management. Considering into their investment policy (24 percent) or sustainability or environmental, social, investment framework (12 percent).⁴² When and governance (ESG) factors in reserve comparing the same subset of institutions management has been a recent focus that responded to our survey two years of central banks. Sustainable investing is ago, we find that the inclusion of ESG⁴³ has inspired by global initiatives such as the increased slightly, from 27 percent to 34 Network for Greening the Financial System percent. (NGFS), the United Nation’s Sustainable Development Goals (SDGs), and the Paris Agreement on climate change. FIG U RE 56. IN C LU SIO N O F E N VI R O N ME N TAL, S O C I AL, AN D G OVE R N AN C E (E S G ) FAC TORS IN T H E IN V E ST M E N T PO LI CY 100% 16% 23% 11% Percentage of respondents 11% Yes 30% No, but it is included in the investment framework 26% 50% No, but it is under discussion No 43% 40% 0% 2021 2023 N=104 Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks. Environmental considerations are more governance factors are remarkably similar important than social or governance factors (28 percent on average), a higher proportion for central banks. Figure 57 represents of central banks (35 percent) incorporate the answers received individually for the environmental factors in their investment environment (E), social (S), and governance policy and framework. (G) factors. While results for social and These percentages differ from those displayed in Figure 56, (23 and 11 percent, respectively) as we only consider the set of central banks that responded ⁴²  to both surveys when making comparisons. Throughout this document, we define the inclusion of ESG as whether respondents include ESG factors in the investment policy and/or the investment ⁴³  framework. SUSTAINABLE I NV E ST I NG ( E S G ) 49 FIG U RE 57. IN C LU SIO N O F E S G I N T H E I N VE ST ME N T P O LI CY: I N D I VI D UAL E S G FAC TORS 100% 17% 16% 24% 12% 11% Percentage of respondents 11% 24% 24% Yes 26% No, but it is included in the investment framework 50% No, but it is under discussion No Left unanswered 44% 46% 39% 0% Environmental Governance Social N=119. Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks. Many central banks continue to face with the global average of 24 percent ESG significant constraints to implementing adoption in the investment policy, 45 percent sustainability. The survey asked central of European and Central Asian central banks whether ESG factors are considered banks embraced ESG elements, followed part of their investment mandate on top by 26 percent in South and East Asia and of the traditional investment objectives of the Pacific. The higher rate of adoption in liquidity, safety, and return. Of the 119 central Europe is likely related to the European banks that responded to this question, only Union’s strong ESG public and political 24 percent indicated that sustainability was focus. The two other regions, the Americas part of the investment mandate. and the Caribbean, and the Middle East and Africa, lag significantly. Although these Significant differences exist across regions, regional biases were already present in our with Europe and Central Asia leading the 2021 survey, we observe a further increase pack of adopters, followed closely by South in ESG adoption among European central and East Asia and the Pacific. Compared banks in recent years. FIG U RE 58 . IN C LU SIO N O F E S G I N T H E I N VE ST ME N T P O LI CY BY G E O G R AP H I C R E GION 100% 6% 13% Percentage of respondents within group 26% 17% 45% 47% 13% 32% Yes 50% 10% No, but it is included in the investment framework No, but it is under discussion No 24% 16% 58% 47% 26% 21% 0% Americas & Europe & Middle East & South & East Caribbean Central Asia Africa Asia & Pacific N=119. Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks. SUSTAINABLE I NV E ST I NG ( E S G ) 50 Central banks in countries with higher among lower-middle- and low-income incomes adopt ESG more frequently countries. (Figure 59). The proportion of central banks adopting ESG in their investment policy or Reserve size also matters in ESG adoption. investment framework increases to close to Large reserve-holding central banks are 50 percent in high-income countries versus more sensitive to ESG investing. Fifty-one 24 percent for the entire sample. We obtain percent of respondents with more than comparable results for including ESG in the US$50 billion of reserves endorsed ESG investment mandate, reaching 42 percent investing, whereas less than 30 percent of in high-income countries versus 16 percent central banks with less than US$3 billion did. FIG U RE 59. IN C LU SION O F E S G I N T H E I N VE ST ME N T P O LI CY BY C O U N T RY I N C OM E G ROU P A N D SIZ E OF T H E R E S E RVE S (U S $ , B I LLI O N S ) Country income Size of reserves (US$) 100% 5% 11% 12% Percentage of respondents within group 8% 19% 14% 32% 35% 18% 24% 49% 9% 16% 21% 7% Yes 32% 16% No, but it is included in the investment framework 50% 11% No, but it is under discussion 36% No 63% 35% 26% 56% 54% 38% 25% 15% 13% 0% Lower Upper High Less than 3 to 10 10 to 50 More than middle and middle income 3 billion billion billion 50 billion low income income N=119. Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks. ESG adoption is much more frequent their reputation, and (ii) generating a among central banks that invest in positive impact (Figure 60). Seventy-three equities, whether in developed markets, percent of central banks that include ESG emerging markets, or both. The proportion factors chose reputation as a highly relevant of ESG adoption jumps from 26 percent motivating factor, followed by generating for central banks not allowed to invest in a positive impact (61 percent). This finding equities to 62 percent for those that are. is consistent with the 2021 survey. Central Similarly, central banks that adopt ESG have banks play a critical role in their countries, a higher allocation to equity than those that leading by example. The reputational do not include ESG factors in their policy or motivation is essential for central banks with investment framework.⁴⁴ This may reflect large reserves and lower-middle- and low- the broader adoption of ESG principles in income countries where reserves can be the equity market than in the bond market. even more vital. Having a positive impact is also an important motivating factor for lower- The primary motivating factors for central middle- and low-income countries. banks to include ESG are (i) maintaining The average actual allocation to developed or emerging market equities increases from 1.1 percent to 3.1 percent among those that include ESG. ⁴⁴  SUSTAINABLE I NV E ST I NG ( E S G ) 51 Risk-return enhancement only appears as investors for which ethical considerations the third motivation, and it remains limited, are more important than financial motives.⁴⁵ as only 15 percent of respondents assessed Notably, public and peer pressures are not this motivation as highly significant. This significant for ESG adoption. is consistent with observations from other FIG U RE 60. M OT IVAT IN G FAC TO R S TO I N C O R P O R AT E E S G 100% 9% 6% 15% 15% 24% Percentage of respondents 39% 61% 73% 42% 50% Highly significant 85% Somewhat significant Not significant 67% 55% 30% 42% 18% 0% 9% 9% Reputation / Positive Risk / return Public Peer pressure Legal brand environmental enhancement pressure to requirements / social invest in ESG impact N=33. Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks. Note: We consider only those respondents that reported incorporating ESG. The main challenge in adopting ESG However, central banks also face other investing is balancing the practice constraints to broader ESG adoption. The with traditional investment objectives. supply of sustainable instruments is limited, Unsurprisingly, central bank reserve managers staff expertise is often insufficient, and noted that the main challenge they face in investment guidelines may be too restrictive. extending their adoption of ESG is the trade- While the last two obstacles might rapidly off between traditional objectives (i.e., safety, decrease for central banks determined to liquidity, and return) and the sustainability implement ESG investing,⁴⁷ the supply issue dimension (Figure 61).⁴⁶ It is difficult for central might take longer to fix. A good example is banks to solve this trade-off without a specific the supply of green, social, and sustainability mandate. Indeed, diversification away from bonds, an instrument of choice for central the traditional asset classes, such as high- banks in their sustainability strategy. While quality government bonds, might deteriorate the market capitalization of these bonds has liquidity or the perception of short-term risk. grown over time, they represent less than By contrast, sustainability risks might only three percent of the global fixed-income affect portfolios in the longer run. market. Neither reputational risks around greenwashing nor reserve adequacy are a concern for respondents. In a survey analysis of a large panel of individual investors on ESG preferences, Giglio et al. (2023) find that 45 percent of survey respondents do not ⁴⁵  see any reason to invest in ESG; 25 percent are primarily motivated by ethical considerations; climate hedging motives drive 22 percent; and 7 percent are motivated by return expectation. Focusing more specifically on climate risks and institutional investors, Krueger, Sautner, and Starks (2020) found reputation protection to be the primary motivation, before ethics and fiduciary duty, while returns and risks appear only as the fourth- and fifth-place motivations. While “data issues and challenges” was not part of the choices offered to the central banks, we observe that this is frequently mentioned by central ⁴⁶  banks and other institutional investors. A worldwide study by Statista of asset owners and managers found that “Challenges around data quality and consistency” was the main barrier to further ESG investing for 39 percent of the respondents, followed by “Inconsistent data across asset classes” (38 percent) and “Conflicting ESG ratings” (28 percent). For instance, in regions such as Europe and Central Asia, where ESG has been more widely adopted by central banks, limited staff expertise is judged a ⁴⁷  highly significant obstacle by less than 5 percent of the central banks versus 23 percent worldwide. SUSTAINABLE I NV E ST I NG ( E S G ) 52 FIG U RE 61 . C H A L L E N G E S TO I N C O R P O R AT I N G S U STAI N AB LE I N VE ST I N G 100% 10% 6% 15% 12% 3% 25% 24% 20% Percentage of respondents 48% 19% 29% 35% 31% 35% 45% 50% Highly significant 91% Somewhat significant 32% 66% 62% Not significant 49% 52% 40% 31% 20% 0% Trade-off Mandate Low supply of Limited staff Insufficient Overvalued Reputational Other between constraints sustainable expertise reserve sustainable risks related to traditional instruments adequacy investment ESG-washing objectives and products sustainability N=105. Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks. Central banks that pursue ESG deploy a Central banks have turned to other diverse set of investment strategies that strategies for corporate bond and equity vary by type of instrument (Figure 62), portfolios. Negative screening and ESG although some strategies are more common integration investments are the main than others. These include investing in ESG- strategies for investment-grade corporate labeled bonds (employed by 65 percent bonds. Moreover, some central banks use of respondents), negative screening (56 positive or best-in-class screening to select percent), ESG integration (44 percent), corporate bond investments. For equity, the positive screening (21 percent), active most common strategies are ESG integration investor engagement (12 percent), and and negative screening. impact investing other than labeled bonds (9 percent). Across asset classes, active ownership is the strategy central banks used the Central banks mainly use labeled bonds least. The asset class where central banks to implement their ESG strategies for pursue active ownership the most is in government bonds and SSA securities. equity, yet it is used by only 12 percent of Sixty-five percent of institutions that have respondents overall. This is remarkable as adopted ESG, invest in labeled instruments. it is a critical investment strategy for most This is an increase of 13 percentage asset managers and owners—its impact can points when comparing the same set of be more significant. Moreover, we notice respondents of this survey and the 2021 a decline from 22 percent to 13 percent of survey. Meanwhile, negative screening is central banks using active ownership as a used by 56 percent of central banks that strategy compared to 2021. incorporate ESG and has become more prevalent for these asset classes (52 percent compared to 35 percent in 2021). SUSTAINABLE I NV E ST I NG ( E S G ) 53 FIG U RE 62 . ST RAT E G IE S U S E D F O R E S G I MP LE ME N TAT I O N Government Corporate High-yield ESG Strategy Equity Total /SSA bonds bonds bonds Impact investing with labeled bonds (i.e., green 65% 30% 2% 65% bonds, social bonds, sustainability bonds) Negative/exclusionary screening 40% 37% 26% 9% 56% ESG integration 30% 30% 28% 5% 44% Positive/best-in-class screening 12% 9% 7% 21% Active ownership and engagement 2% 5% 9% 12% Impact investing different from green, social, 7% 5% 2% 9% or sustainability bonds Other 2% 9% 12% N=43. Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks. * Total refers to the use, of the corresponding ESG strategy regardless of the type of instrument, if the strategy is used with at least one of the instrument types. Note: We consider only those respondents that reported incorporating ESG. ESG investment strategies differ slightly 3.2 percent of their portfolio to ESG-labeled between the Europe and Central Asia instruments. The highest allocation is to green region and other regions. Central banks in bonds, which have an average allocation of Europe and Central Asia tend to be more 3.5 percent, compared to 1.5 percent and 3.4 active in negative screening for corporate, percent for social and sustainability bonds, government and SSA bonds, and equity respectively.⁴⁸ However, the participation than the global average. Only 5 percent of and the number of central banks with central banks in this region use a best-in- labeled bonds increased compared to the class approach for government bonds and 2021 survey. In the 2021 survey, 19 percent SSAs, compared to 12 percent for all central of respondents had green bonds in their banks investing in ESG. portfolios; the 2023 survey saw this figure rise to 26 percent. Similarly, the percentage While distinctive ESG strategies have of central banks with sustainability bonds expanded, the actual allocation to ESG more than tripled, from 3 to 11 percent (Figure instruments remains limited. On average, 63). Government and SSA bonds represent central banks with ESG investments allocate the majority of this allocation. These numbers do not match those shown in Figure 63 as they refer to the full sample and not to the subsample of central banks that responded to both ⁴⁸  surveys. SUSTAINABLE I NV E ST I NG ( E S G ) 54 FIG U RE 63 . A L LO CAT IO N O F R E S E RVE S TO D I F F E R E N T T Y P E S O F E S G - LAB E LE D B O N DS Change in use of ESG instruments Change in allocation to ESG instruments 30% 5% 26% 4.0% Average allocation (percent) 4% Percentage of respondents 3.5% 20% 19% 2.9% 3% 2.4% 11% 2% 1.8% 10% 8% 1.0% 1% 3% 3% 0% 0% 2021 2023 2021 2023 2021 2023 2021 2023 2021 2023 2021 2023 Green Social Sustainability Green Social Sustainability N=104. Source: Fourth RAMP Survey on the Reserve Management Practices of Central Banks. Central banks have started to embrace for sovereigns). This is in line with central sustainability metrics in their reports. banks’ publicly available sustainability ESG reporting is an essential dimension reports. ESG scores and ratings rank second for central banks when they report (i.e., with 41 percent of respondents. While they internally or externally) on the sustainability were initially the banks’ point of focus, they content of their portfolios. Measures such as have been replaced by indicators deemed carbon footprint, ESG scores, and SDGs are more transparent, easier to access, or more becoming more common. closely related to specific impact.⁴⁹ Carbon footprint is the most prevalent Carbon footprint reporting is more measure (Figure 64). Sixty-three percent frequent among central banks with larger of respondent central banks calculate the reserves, in high-income countries, and in carbon footprint of their portfolios (i.e., Europe and Central Asia. More specifically, greenhouse gas emissions scaled by the number of ESG metrics reported economic sizes such as enterprise value increases with the size of the reserves and for corporates or gross domestic product the country’s income level.⁵⁰ For instance, in a study of institutional investors, Lopez de Silanes, McCahery, and Pudschedl (2022) show that transparent disclosure is a more critical ⁴⁹  determinant of investor holdings than the ESG ratings themselves. Central banks with reserves above US$50 billion report, on average, 1.9 ESG metrics, compared to 0.8 among central banks with reserves below US$3 ⁵⁰  billion. Similarly, central banks in high-income countries report, on average, 1.7 metrics compared to 0.8 metrics among lower-middle- and low-income countries. Central banks in Europe and Central Asia report 1.7 metrics on average, while central banks in Middle East and Africa do not report any metric at all. SUSTAINABLE I NV E ST I NG ( E S G ) 55 FIG U RE 64 . E SG M E T RIC S MO N I TO R E D AN D / O R R E P O RT E D 100% Percentage of respondents 80% 63% 60% 41% 40% 24% 20% 12% 7% 0% Carbon footprint or other ESG scores/ratings Sustainable Development Social indicators Not applicable environmental measures Goals (SDGs) N=41. Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks. Note: We consider only those respondents that reported incorporating ESG. Results add up to more than 100 percent because respondents could choose more than one option. 56 6. Information Technology (IT) Adopting robust and scalable technology asset management solutions and the solutions is essential for reserve technology landscape supporting reserve management. It is critical to process management operations. The survey financial transactions and their life cycle inquired how central banks use technology electronically and automatically with minimal to support critical functional areas. The manual intervention using straight-through survey also explored the key technology processing (STP). STP technology solutions initiatives that central banks implement streamline reserve management operations or explore for their reserve management and improve efficiency and accuracy as they operations. reduce the risk of errors and accelerate transaction processing times. They also Survey results suggest that vendor allow institutions to analyze their portfolios, solutions are predominant in supporting enhance decision-making, mitigate risks, key business areas of reserve management and optimize portfolio performance. operations. An average of 60 percent of Additionally, a solid technological framework respondents use vendor-built IT solutions for enhances the security and integrity of reserve management.⁵¹ Besides, 22 percent reserve operations with robust cybersecurity use a combination of both third-party vendor measures, protecting sensitive financial solutions and systems built in-house.⁵² We information and ensuring the integrity of also find that an average of 20 percent of transactions. A recent trend is the adoption IT solutions used in the middle office are of front-to-back systems that cover all or systems built in-house (Figure 65). There most reserve management functions. is room for broader adoption of vendor- built IT solutions, considering that central Considering the relevance of this topic, banks’ expertise does not lie in developing the 2023 survey on reserve management technological solutions for investment practices included questions about IT for the management. first time. The purpose was to understand This number refers to the entire sample regardless of the specific business area. ⁵¹  ⁵² This number refers to the entire sample regardless of the specific business area. 100% 9% 14% 16% Percentage of respondents within eac 20% 18% 24% business area INFO RM ATIO N T E CH NO LO GY 66% 67% 49% 58% 57 51% 50% 51% FIG U RE 65. SOFT WA RE SO U R C E BY B U S I N E S S AR E A 28% 26% 18% 22% 24% 24% Front Office Middle Office 0% Operations Accounting 100% 9% Pre-trade Trade capture Credit risk and Market risk Performance Complianc 10% Percentage of respondents within each 14% 16% 13% 20% 18%analysis and portfolio monitoring monitoring measurement monitoring 24% monitoring and monitoring In-house business area 3rd+party 67% 49% 51% 66% 58% 63% Both 50% 51% 77% Not applicable 28% 26% 18% 22% 24% 24% 22% 10% 0% Pre-trade Trade capture Credit risk and Market risk Performance Compliance Trade Investment analysis and portfolio monitoring monitoring measurement monitoring settlement/ accounting of monitoring and monitoring SWIFT reserve portfolio In-house N=73, 103, 87, 96, 99, 87, 108, 100, respectively. 3rd+party Both Not applicable Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks. Note: The number of respondents differs across business areas as we only consider those that reported using a system in the corresponding business area. Although central banks have historically as a service (SaaS) model, the provider favored on-premises deployment for owns, delivers, and operates the software reserve management systems, a small remotely, allowing users to connect and use proportion of central banks have adopted the cloud-based solution over the internet. web-based application deployment In the hosted or application service provider models. An average of 63 percent of (ASP) model, the software is installed at respondents use the on-premises model, an off-site data center, managed by the meaning the software is within the physical provider, and accessible through a web confines of the organization, the bank has its browser or a client application. The SaaS own servers and data centers, and central and ASP models were implemented by 19 bank staff manage the software.⁵³ However, and 5 percent of banks, respectively.⁵⁴ Pre- over a quarter of respondents have chosen trade analysis, credit risk, and market risk to adopt cloud-based solutions and manage are the functions with the highest use of services over the internet. In the software SaaS (Figure 66). ⁵³This number refers to the entire sample regardless of the specific business area. ⁵⁴ This number refers to the entire sample regardless of the specific business area. 100% Percentage of respondents within each 55% 57% 57% 64% INFO RM ATIO N T E CH NO LO GY 66% 58 67% business area 50% FIG U RE 66. SOFT WA RE DE P LOY ME N T T Y P E BY B U S I N E S S AR E A 30% 24% 25% 17% 19% 15% 3% 5% 5% 3% 5% 6% Front Office Middle Office Operations Accounting 15% 15% 10% 11% 13% 12% 0% 100% Percentage of respondents within each Pre-trade Trade capture Credit risk and Market risk Performance Compliance analysis and portfolio monitoring monitoring measurement monitoring se monitoring and monitoring 55% 57% 57% 66% 64% 67% 65% On-Premise business area 77% Software as a service (SaaS) Application Service Provider (ASP) 50% Not applicable 30% 24% 25% 17% 19% 15% 17% 6% 3% 5% 5% 3% 7% 5% 5% 6% 11% 15% 13% 12% 15% 11% 12% 0% 10% Pre-trade Trade capture Credit risk and Market risk Performance Compliance Trade Investment analysis and portfolio monitoring monitoring measurement monitoring settlement/ accounting of monitoring and monitoring SWIFT reserve portfolio On-Premise N=73, 103, 87, 96, 99, 87, 108, 100, respectively. Software as a service (SaaS) Application Service Provider (ASP) Not applicable Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks. Note: The number of respondents differs across business areas as we only consider those that reported using a system in the corresponding business area. Central banks have long relied on legacy Survey results find that central banks keep technologies, tools, and processes, and their reserve management solutions in adopting new technologies in reserve place for extended periods (Figure 67). management is a slow process. While Forty-nine percent of central banks have commercial banks and other market used their reserve management IT system for participants have made considerable efforts over ten years. Only 15 percent state that they to digitalize their business models in recent implemented a new solution within the past years, central banks still need to prioritize five years. Often, the functions for which IT their organizations’ digital transformations. solutions are kept for the longest period are While the level of maturity varies greatly, for the back office functions and investment some central banks have successfully accounting, where 64 and 55 percent of embarked on the journey to transform their IT central banks, respectively, have used those departments into proactive business partners IT solutions for more than ten years. with a clear strategic mandate. FIG U RE 67. SYST E M S’ T IME I N P R O D U C T I O N 15% 15% Less than 5 years 5 - 10 years More than 10 years 21% Not applicable 49% N=120 Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks. Note: Systems’ time in production, on average, considering all business areas. INFO RM ATIO N T E CH NO LO GY 59 This finding is surprising, considering the rapid Nevertheless, many central banks are pace of technological progress in the financial upgrading or acquiring new systems. industry and the systematic importance of Although replacing or adopting new system central banks. Institutions require a broader solutions is a significant undertaking for range of IT capabilities and more agile any organization, some central banks have organizations to manage rapid technological recognized the need for transformation and change. Central banks must be at the forefront have begun initiatives to modernize their of technological developments, intensifying technology infrastructures. Sixty-one percent the dialog with technology providers, of respondents indicated that they were in the exchanging know-how with other public process of system renewal or upgrade: either institutions, learning from each other, and an STP system or a Portfolio Risk Management sharing best practices. System, or both. Implementing ISO 20022⁵⁵ is also high on the list of IT priorities. FIG U RE 68 . A RE AS RE L AT ED TO I T T H AT I N ST I T U T I O N S AR E I MP LE ME N T I N G O R E X P LO RIN G FOR T H E IR RE SE RV E M A N AG E ME N T O P E R AT I O N S Implementing ISO 20022 50% New Straight-Through Processing (STP) for reserve management 41% Upgrading the current STP reserve management system 35% Upgrading the portfolio risk management system 24% New standalone portfolio risk management system 10% 0% 50% 100% Percentage of respondents N=103. Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks. Note: Results add up to more than 100 percent because respondents could choose more than one option. The asset base was not a factor in the on size: it involves multiple factors, including decision to upgrade or acquire new the size and complexity of the portfolio, systems. In analyzing this response, we the organization’s objectives, regulatory did not find any pattern according to requirements, operational efficiency, risk central banks’ different reserve levels. The management considerations, and cost- justification for the expense of a portfolio benefit analysis. management system does not solely rely ISO 20022 is an international standard for exchanging electronic payment instructions (i.e., messages) to enable communication between financial ⁵⁵  institutions. 60 7. Concluding Observations Central banks faced extraordinary challenges in 2022. Bond markets experienced unprecedented mark-to-market losses with the substantial increase in inflation and interest rates. Portfolio diversification was probably insufficient and did not work as expected—most asset classes delivered negative returns. The strength of the US dollar went together with depreciations in emerging market currencies, which led to reserve liquidation. Despite this complex environment, central banks were resilient. Negative returns did not cause substantial changes in reserve management policies. This demonstrates the strong governance underlying central banks’ reserve management. Maintaining longer investment horizons and diversification is essential in the current interest rate environment and will ensure higher portfolio returns going forward. We found a significant improvement in governance, with the investment committee gaining decision-making power compared to previous surveys. As investment committees are more autonomous in the approval of the investment guidelines, institutions make investment decisions more efficiently. The US dollar remains the primary currency in reserve portfolios, followed by the euro. Also, survey respondents did not reduce their appetite for the dollar. Another interesting finding is that more than half of central banks reported reducing duration in 2022 in response to rising rates and high inflation, but the reported change was small. Traditional asset classes, such as government bonds from developed markets, bank deposits, money market instruments, SSA bonds, and gold, continue to dominate reserve portfolios. The allocation to nontraditional asset classes remained stable over the past two years as opposed to our previous surveys where we saw gradual increases. Sustainable investment is also gaining ground among central banks, especially for the most advanced, who are leading the way. The implementation of sustainability in reserve portfolios still faces many challenges, such as balancing these practices with the traditional investment objectives and the low liquidity of sustainable investment instruments. Nonetheless, we observe increasing efforts from central banks to contribute to the financing of the transition to a more sustainable economy. As observed in previous surveys, risk management remains an area for improvement. The slow but continuous trend toward diversification requires more advanced risk management practices. Insufficient adoption of quantitative risk measures is a particular area of concern. Finally, strengthening the technological framework for reserve management remains a priority. Technology advances quickly, and central banks have been lagging in implementing cutting-edge solutions for asset management. It is thus critical to accelerate the adoption of new technologies. 61 8. References Aizenman, J. 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World Bank Data. Retrieved from World Bank Country and Lending Groups. World Bank, Washington, DC. https://datahelpdesk.worldbank.org/knowledgebase/ articles/906519-world-bank-country-and-lending-groups.  63 9. Abbreviations ABS Asset-backed securities SDR Special drawing rights ARA Assessing Reserve Adequacy SSA Sovereign, supranational, and agency ASP Application service provider STP Straight-through processing CBDC Central bank digital currency TE Tracking error CDS Credit default swap VaR Value at risk CVaR Conditional value at risk DM Developed markets EM Emerging markets ESG Environmental, social, and governance ETF Exchange-traded fund FX Foreign exchange HY High yield IMF International Monetary Fund IR Interest rate IT Information technology MBS Mortgage-backed securities RAMP Reserve Advisory and Management Partnership Repo Repurchase agreement SAA Strategic asset allocation SaaS Software as a service 64 10. Appendix A . S U RV E Y B AC KG R O U N D A N D M E T H O D O LO GY The fourth RAMP survey is part of a series of biennial surveys initiated by RAMP in 2019. RAMP’s first survey, the Inaugural RAMP survey on reserve management practices, had input from 99 central banks, reflecting data from the fourth quarter of 2017. The second survey was published in 2020, with information from 105 central banks from the fourth quarter of 2019. The third survey, published in 2021 with information from 119 central banks, contained data from the fourth quarter of 2021. This edition of the survey comprised 35 questions, and covered governance; asset allocation; portfolio management; risk management; environmental, social, and governance factors (ESG); and information technology. It also included an open-ended question on reserve managers’ main challenges and the measures they took to address them. Some questions gave a predefined set of potential responses, while others requested specific data. Respondents were asked to provide data as of December 31, 2022. We received responses from 125 institutions in different geographic regions, country income groups, and reserves sizes.⁵⁶ This report uses group categories devised so that an approximately similar number of institutions is represented in each category (Figure 69). The geographic region and income group categories are based on the World Bank’s region and income country classification system. The income group is, in turn, based on GNI per capita calculated using the World Bank Atlas Method. FIG U RE 69. DIST RIB U T IO N O F R E S P O N D E N TS BY G E O G R AP H I C R E G I O N , C O UN TRY IN C O M E , A N D SIZ E OF T H E R E S E RVE S (U S $ , B I LLI O N S ) Geographic region Country income Size of reserves (US$) 50% 39% 40% Percentage of respondents 35% 34% 30% 27% 27% 27% 27% 23% 22% 21% 20% 17% 10% 0% Americas & Europe & Middle East South & Lower Upper High Less than 3 3 to 10 10 to 50 More than Caribbean Central & Africa East Asia & middle and middle income billion billion billion 50 billion Asia Pacific low income income N=125. Source: World Bank country and lending groups (World Bank 2023), 2023 RAMP survey on the Reserve Management Practices of Central Banks. The report separates countries into the following groups: “low income” (GNI per capita of $1,135 or less in 2022); “lower-middle income” ($1,136 to $4,465); ⁵⁶  “upper-middle income” ($4,466 to $13,845), and “high income” ($13,845 or more) (World Bank 2023). For this analysis, “lower-middle-income” and “low- income” countries have been grouped into the same category. APPENDIX: SU RV E Y BACKG RO U ND A ND M E T HOD OLOGY 65 Table 10.1 depicts relevant metrics and shows that reserve levels and reserve adequacy metrics vary considerably by category.⁵⁷ TA B L E 1 0.1 . SU RV E Y PA RT I C I PAN TS ’ MAC R O E C O N O MI C I N D I CATO R S AN D R E S ERVE A D E Q UACY M E T RIC S Number of central GDP per capita Total reserves Total reserves to Import cover Geographic region banks (Current US$) (US$ million) GDP (%) (months) Americas & Caribbean 26 15,534 44,896 0.3 4.4 Europe & Central Asia 44 30,773 69,686 0.2 3.7 Middle East & Africa 34 5,834 21,144 0.2 5.0 South & East Asia & Pacific 21 20,127 345,125 0.3 6.2 Number of central GDP per capita Total reserves Total reserves to Import cover Country income group banks (Current US$) (US$ million) GDP (%) (months) Lower middle and low 42 2,490 27,721 0.2 5.3 income Upper middle income 34 8,295 133,004 0.3 5.4 High income 49 41,334 133,065 0.3 3.5 Number of central GDP per capita Total reserves Total reserves to Import cover Size of reserves (US$) banks (Current US$) (US$ million) GDP (%) (months) Less than 3 billion 34 12,351 1,498 0.3 3.7 3 to 10 billion 29 9,487 6,026 0.2 4.6 10 to 50 billion 28 19,992 24,679 0.2 4.1 More than 50 billion 34 33,464 331,417 0.3 5.2 Number of central GDP per capita Total reserves Total reserves to Import cover Foreign exchange regime banks (Current US$) (US$ million) GDP (%) (months) Floating 61 28,702 120,648 0.2 3.9 Hard Peg 10 13,006 49,925 0.5 4.4 Soft Peg 54 9,127 81,510 0.3 5.8 Grand Total 125 19,072 98,217 0.3 4.5 Source: IMF’s World Economic Outlook with annual data as of 2022, World Bank’s World Development Indicators with data as of 2021, and Fourth RAMP survey on the Reserve Management Practices of Central Banks. Note: GDP = Gross Domestic Product. We display the average of the macroeconomic indicators for each of the groups. Total reserves comprise holdings of monetary gold, special drawing rights, reserves of International Monetary Fund members held by the a.  International Monetary Fund, and holdings of foreign exchange under the control of monetary authorities. The gold component of these reserves is valued at year-end (December 31) London prices. Data is in current US dollars. Respondents have been classified using the country income group categories defined by the World Bank as of July 2022, in effect until July 2023. b.  The respondent central banks’ assets under management (AUM) were categorized into four groups, each with a similar number of survey c.  participants. d. All averages are simple averages (not weighted by reserve levels). e. We report findings based on geographic region, country income group, and size of reserves as we think that these categories broadly reflect the different types of central banks. We find that the income country and size of reserves groups are positively correlated when testing the relationship between the two. However, given that the statistical analysis in this report is limited and that this association is somewhat expected, we do not investigate further. The adequacy of central banks’ levels of foreign exchange reserves can be measured in various ways, including coverage of imports and short-term ⁵⁷  debt obligations. Unless otherwise specified, this report uses the term “adequacy” to denote a central bank’s possession of sufficient reserve assets to execute its mandate and achieve its objectives. APPENDIX: SU RV E Y BACKG RO U ND A ND M E T HOD OLOGY 66 The percentages reported in this report are based on the number of respondents for each question, where 100 percent refers to the total number of respondents replying to a given question. Although most participants provided extensive information, some did not answer all the questions. Similarly, the percentages reported whenever we analyze data by group refer to the percentages within a specific group, where the sum of the percentages for a specific group sum up to 100 percent. Survey results are presented in an aggregate format to preserve anonymity. We aggregate data across different categories, including geographic region, country income group, size of the reserves, reserve adequacy levels, and monetary policy and exchange rate regimes. We only consider central banks that responded to both surveys to identify changes between surveys and assess differences in the respondents’ responses across surveys. Similarly, we only analyze responses across surveys when the survey questions are directly comparable. The report presents the patterns that then emerged. B . D E T A I L E D R E S U LT S F O R T H E M O S T R E L E V A N T Q U E S T I O N S Governance TA B L E 1 0. 2 . N U M B E R O F STAF F S U P P O RT I N G R E S E RVE MAN AG E ME N T BY S I Z E OF THE RE SE RV E S ( U S$ , B IL L ION S ) Less than 3 billion 3 to 10 billion 10 to 50 billion More than 50 billion Grand Total Average Min. Max. # Average Min. Max. # Average Min. Max. # Average Min. Max. # Average Min. Max. # Back office 6 1 22 29 7 3 16 29 10 3 27 25 19 3 80 28 11 1 80 111 Middle office 4 1 10 28 5 1 10 28 9 4 32 26 15 3 50 28 8 1 50 110 Front office 4 1 9 31 6 1 11 29 9 3 27 26 20 4 100 28 10 1 100 114 Total 13 3 36 33 18 8 40 29 29 10 81 28 62 13 210 31 31 3 210 121 Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks. Note: Column “#” refers to number of respondents. APPENDIX: SU RV E Y BACKG RO U ND A ND M E T HOD OLOGY 67 Strategic Asset Allocation (SAA) TA B L E 1 0. 3 . U SE O F T RA N C H I N G BY G E O G R AP H I C R E G I O N , C O U N T RY I N C O ME G ROUP, SIZ E OF T H E RE SE RV E S ( U S $ , B I LLI O N S ), AN D E XC H AN G E R AT E R E G I ME Geographic region Yes No Americas & Caribbean 80% 20% Europe & Central Asia 56% 44% Middle East & Africa 94% 6% South & East Asia & Pacific 67% 33% Country income Yes No Lower middle and low income 88% 12% Upper middle income 88% 12% High income 51% 49% Size of reserves (US$) Yes No Less than 3 billion 82% 18% 3 to 10 billion 86% 14% 10 to 50 billion 71% 29% More than 50 billion 56% 44% Exchange rate regime Yes No Floating 59% 41% Soft Peg 85% 15% Hard Peg 100% Grand Total 73% 29% Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks. Note: Percentages refer to percentage of respondents. We excluded observations where the total sum of the individual tranches was either below 85% or above 115%. APPENDIX: SU RV E Y BACKG RO U ND A ND M E T HOD OLOGY 68 TA B L E 1 0. 4 . T RA N C H E A L LO CAT I O N S I N R E S E RVE P O RT F O LI O S Working capital Investment Liquidity tranche Other tranche tranche Average 18.9 38.9 43.9 21.6 Median 11.0 35.5 41.5 15.0 Min. 2 1 1 1 Max. 100 88 95 66 Respondents with allocation 51 74 72 37 Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks. Note: We excluded observations where the total sum of the individual tranches was either below 85% or above 115%. TA B L E 1 0. 5. AV E RAG E I N VE ST ME N T H O R I ZO N O F T H E T R AN C H E S (MO N T HS ) BY G E O G RA PH IC RE G ION , C O U N T RY I N C O ME G R O U P, S I Z E O F T H E R E S E RVE S (U S $ , B I LLION S ) Working capital Investment Total portfolio Geographic region Liquidity tranche Other tranche tranche (untranched) Americas & Caribbean 1.7 12.4 39.5 21.0 45.0 Europe & Central Asia 4.0 17.1 31.6 36.0 45.6 Middle East & Africa 1.5 17.7 55.2 36.0 23.0 South & East Asia & Pacific 2.3 26.7 43.1 32.0 39.0 Working capital Investment Total portfolio Country income Liquidity tranche Other tranche tranche (untranched) Lower middle and low income 1.6 16.6 48.2 27.6 36.0 Upper middle income 2.2 12.2 38.0 12.0 16.8 High income 3.4 25.2 43.9 42.0 49.5 Working capital Investment Total portfolio Size of reserves (US$) Liquidity tranche Other tranche tranche (untranched) Less than 3 billion 3.2 12.4 49.7 36.0 49.8 3 to 10 billion 2.0 14.6 34.9 30.0 39.0 10 to 50 billion 1.0 19.9 39.0 32.0 27.6 More than 50 billion 1.0 29.7 57.3 36.0 52.0 Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks. Note: The “total portfolio (untranched)” category applies to respondents that do not use a tranching methodology. We excluded observations where the total sum of the individual tranches was either below 85% or above 115%. APPENDIX: SU RV E Y BACKG RO U ND A ND M E T HOD OLOGY 69 TA B L E 1 0.6. AV E RAG E D U R AT I O N O F T H E T R AN C H E S (MO N T H S ) BY G E O G R AP H I C R EGION , C O U N T RY IN C OM E G ROUP, S I Z E O F T H E R E S E RVE S (U S $ , B I LLI O N S ) Working capital Total portfolio Geographic region Liquidity tranche Investment tranche Other tranche (untranched) Americas & Caribbean 2.0 8.3 27.1 10.0 36.4 Europe & Central Asia 5.6 12.7 29.5 30.8 28.4 Middle East & Africa 1.2 9.4 28.6 7.5 16.5 South & East Asia & Pacific 3.7 9.7 31.0 44.7 18.0 Working capital Total portfolio Country income Liquidity tranche Investment tranche Other tranche (untranched) Lower middle and low income 1.4 8.9 25.0 27.8 24.8 Upper middle income 1.3 8.1 23.1 14.0 11.0 High income 7.0 13.3 38.5 27.8 30.7 Working capital Total portfolio Size of reserves (US$) Liquidity tranche Investment tranche Other tranche (untranched) Less than 3 billion 5.3 7.4 32.1 3.0 32.8 3 to 10 billion 1.0 9.0 21.1 18.2 23.8 10 to 50 billion 1.0 12.8 30.2 32.3 16.9 More than 50 billion 2.7 11.8 35.1 69.0 31.5 Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks. Note: The “total portfolio (untranched)” category applies to respondents that do not use a tranching methodology. We excluded observations where the total sum of the individual tranches was either below 85% or above 115%. APPENDIX: SU RV E Y BACKG RO U ND A ND M E T HOD OLOGY 70 TA B L E 1 0.7. C U RRE N CY E LI G I B I LI T Y BY G E O G R AP H I C R E G I O N , C O U N T RY I N C O ME G ROUP, SIZ E OF T H E RE SE RV E S ( U S $ , B I LLI O N S ), AN D E XC H AN G E R AT E R E G I ME Geographic region USD EUR GBP JPY CNY AUD CAD CHF NOK SEK NZD DKK KRW SGD HKD ZAR MXN INR RUB TRY BRL Other Americas & Caribbean 96% 69% 54% 54% 38% 35% 35% 31% 27% 27% 31% 15% 23% 23% 15% 4% 35% Europe & Central Asia 98% 91% 77% 74% 60% 65% 70% 44% 42% 37% 30% 37% 14% 12% 9% 2% 5% 2% 5% 2% 2% 35% Middle East & Africa 100% 94% 82% 58% 76% 55% 58% 42% 33% 36% 27% 27% 27% 15% 12% 30% 9% 6% 9% 9% 6% 36% South & East Asia & Pacific 100% 100% 94% 89% 89% 83% 56% 56% 28% 33% 50% 28% 28% 28% 22% 11% 17% 22% 11% 11% 11% 22% Size of reserves (US$) USD EUR GBP JPY CNY AUD CAD CHF NOK SEK NZD DKK KRW SGD HKD ZAR MXN INR RUB TRY BRL Other Less than 3 billion 100% 82% 64% 36% 52% 36% 27% 18% 12% 15% 21% 9% 6% 6% 3% 18% 3% 3% 36% 3 to 10 billion 97% 93% 76% 83% 66% 59% 59% 48% 34% 34% 31% 24% 17% 14% 10% 14% 10% 7% 7% 3% 3% 34% 10 to 50 billion 100% 93% 89% 71% 71% 61% 61% 61% 39% 46% 32% 43% 25% 18% 11% 4% 4% 4% 7% 7% 4% 36% More than 50 billion 97% 87% 77% 83% 70% 80% 83% 47% 53% 43% 47% 40% 40% 33% 30% 10% 13% 10% 7% 10% 10% 27% Country income USD EUR GBP JPY CNY AUD CAD CHF NOK SEK NZD DKK KRW SGD HKD ZAR MXN INR RUB TRY BRL Other Lower middle and low income 100% 90% 78% 65% 75% 53% 50% 50% 28% 33% 23% 23% 18% 10% 10% 20% 8% 8% 5% 5% 3% 45% Upper middle income 97% 94% 84% 61% 55% 58% 52% 32% 26% 26% 39% 16% 26% 26% 16% 10% 3% 3% 6% 3% 3% 35% High income 98% 84% 69% 73% 61% 63% 65% 43% 45% 41% 37% 41% 22% 18% 14% 6% 8% 6% 6% 6% 6% 22% Exchange rate regime USD EUR GBP JPY CNY AUD CAD CHF NOK SEK NZD DKK KRW SGD HKD ZAR MXN INR RUB TRY BRL Other Floating 98% 90% 78% 80% 75% 69% 75% 51% 47% 44% 37% 37% 31% 24% 19% 7% 8% 3% 5% 3% 3% 36% Soft Peg 100% 88% 78% 59% 63% 53% 43% 37% 24% 27% 31% 22% 14% 12% 8% 18% 4% 8% 6% 6% 4% 31% Hard Peg 90% 80% 50% 40% 10% 20% 20% 20% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 30% Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks. TA B L E 1 0. 8 . ASSE T E L IG I B I LI T Y BY G E O G R AP H I C R E G I O N , C O U N T RY I N C O ME G ROUP, SIZ E OF T H E RE SE RV E S ( U S $ , B I LLI O N S ), AN D E XC H AN G E R AT E R E G I ME Money Inflation- Government Bank IG corporate Covered HY corporate Geographic region market SSA Gold indexed EM bonds MBS ABS DM equity EM equity CBDCs Other bonds deposits bonds bonds bonds instruments bonds Americas & Caribbean 96% 92% 96% 84% 56% 68% 40% 28% 28% 52% 28% 12% 4% 4% 24% Europe & Central Asia 93% 88% 84% 79% 79% 47% 60% 65% 28% 19% 12% 35% 9% 2% 26% Middle East & Africa 97% 91% 97% 97% 74% 41% 44% 38% 44% 38% 29% 18% 6% 12% 3% 18% South & East Asia & Pacific 95% 84% 79% 89% 79% 47% 42% 42% 53% 42% 26% 16% 16% 5% 16% Money Inflation- Government Bank IG corporate Covered HY corporate Size of reserves (US$) market SSA Gold indexed EM bonds MBS ABS DM equity EM equity CBDCs Other bonds deposits bonds bonds bonds instruments bonds Less than 3 billion 94% 84% 84% 88% 63% 41% 47% 41% 31% 31% 28% 16% 3% 13% 3 to 10 billion 93% 90% 93% 93% 69% 52% 52% 52% 34% 34% 24% 17% 14% 7% 3% 31% 10 to 50 billion 96% 89% 89% 82% 79% 46% 46% 61% 29% 32% 7% 21% 4% 25% More than 50 billion 97% 94% 91% 84% 81% 59% 50% 34% 50% 41% 28% 34% 16% 13% 19% Money Inflation- Government Bank IG corporate Covered HY corporate Country income market SSA Gold indexed EM bonds MBS ABS DM equity EM equity CBDCs Other bonds deposits bonds bonds bonds instruments bonds Lower middle and low income 93% 88% 88% 95% 83% 39% 39% 37% 39% 27% 20% 7% 5% 22% Upper middle income 94% 90% 90% 97% 68% 55% 52% 52% 42% 45% 26% 13% 6% 6% 3% 26% High income 98% 90% 90% 73% 67% 55% 55% 51% 31% 35% 22% 41% 16% 6% 18% Money Inflation- Government Bank IG corporate Covered HY corporate Exchange rate regime market SSA Gold indexed EM bonds MBS ABS DM equity EM equity CBDCs Other bonds deposits bonds bonds bonds instruments bonds Floating 98% 93% 92% 82% 73% 57% 57% 52% 40% 38% 23% 30% 10% 7% 2% 23% Soft Peg 92% 86% 88% 92% 78% 45% 41% 41% 33% 35% 24% 14% 4% 4% 18% Hard Peg 90% 80% 80% 90% 40% 30% 40% 40% 30% 10% 10% 20% 20% 10% 30% Source: 2023 RAMP Survey on the Reserve Management Practices of Central Banks. Note: ABS = asset-backed securities; CBDCs = central bank digital currency; DM = developed markets; EM = emerging markets; HY = high yield; IG = investment grade; MBS = mortgage-backed securities; SSA = sovereign, supranational, and agency bonds. Percentages refer to percentage of respondents within each group. 11. Figures & Tables FI G U RE 1 . Evolution of world’s 5 FIGURE 14. Tranching 14 reserves FIGURE 15. Tranching by geographic  15 FI G U RE 2. Countries with declining 6 region, country income reserves in 2022 group, and size of the reserves (US$, billions) FI G U RE 3. Main challenges faced by 7 reserve managers in 2022 F I G U R E 1 6. Tranche allocations in  15 reserve portfolios FI G U RE 4.  Decision-making bodies 8 approving investment F I G U R E 1 7. Metrics used to set 16 policy, the benchmark, and tranches the investment guidelines FIGURE 18. The intersection among   17 FI G U RE 5. Members of the 9 the metrics used to set investment committee tranches F I G U R E 1 9.   Relation between 17 FI G U RE 6 . Unit responsible for 9 designing and proposing the allocation to the the SAA Investment Tranche and metrics used to set FI G U RE 7. Organizational structure 10 tranches for reserve management F I G U R E 2 0. Metric to define risk  19 FI G U RE 8. Number of staff supporting   11 tolerance in the SAA reserve management by framework size of the reserves (US$, billions) FIGURE 21. Change in metrics to  20 define risk tolerance in the FI G U RE 9. Challenges for staff 11 SAA framework development FIGURE 22. Values of the metrics to   20 FI G U RE 1 0. Challenges for staff  12 define risk tolerance in the development by country SAA framework income group FIGURE 23. Investment horizon by  22 FI G U RE 1 1 .  Risk measures reported 12 tranche to the board or the investment committee FIGURE 24. Duration of the different  23 tranches FI G U RE 1 2. Information disclosed to   13 the public, either on a FIGURE 25. Measures taken in 2022  24 mandatory or a voluntary in response to the rising basis rates and high inflation environment FI G U RE 1 3. Average number of   13 metrics disclosed to the F I G U R E 2 6. Changes in duration   24 public by geographic compared to the previous region, country income, survey and size of the reserves (US$, billions) FIGUR ES & TA BLE S 72 FI G U RE 27.  Currency eligibility 25 F I G U R E 4 0. Changes in asset allocation   35 compared to the 2021 FI G U RE 28.  Changes in currency 26 survey eligibility compared to the 2021 survey FIGURE 41. Average actual allocation  36 to each asset class by FI G U RE 29. Average actual allocation   27 geographic region, to each currency country income group, and size of the reserves  Average FI G U RE 30.  actual allocation 27 to each currency for  Portfolio F I G U R E 4 2 .  management 37 respondents with style by tranche exposure FIGURE 43. Maximum TE for actively   37 FI G U RE 31 . Average actual allocation   28 managed portfolios or to each currency by portfolios that apply geographic region, enhanced indexing country income group, and size of the reserves FIGURE 44. Currency deviations from   38 (US$, billions) the benchmark FI G U RE 32. Changes in currency   29 FIGURE 45.  Asset class deviations 39 allocation compared to the from the benchmark 2021 survey F I G U R E 4 6.  Use of derivatives, 40 FI G U RE 33. Currencies used as a   29 investment instruments, numeraire for performance and investment strategies reporting F I G U R E 4 7. Distribution of the number   41 FI G U RE 34. Average allocation to US  30 of external managers dollars and euros by the and share of reserves numeraire externally managed FI G U RE 35. Asset class eligibility   31 FIGURE 48.  Share of reserves 41 externally managed by FI G U RE 36 . Eligibility to nontraditional   32 the number of external asset classes by managers geographic region, country income group, F I G U R E 4 9. Asset classes permitted by   42 and size of the reserves external managers FI G U RE 37. Changes in asset class  32 F I G U R E 5 0. Asset classes used by   42 eligibility compared to the external managers 2021 survey FIGURE 51.  Minimum credit rating 43 FI G U RE 38.  Average actual allocation 33 for eligible issuers in the to each asset class for asset classes listed respondents FIGURE 52. Percentage of central  44 FI G U RE 39. Average actual allocation   34 banks with changes in to each asset class credit ratings from the for respondents with 2021 survey exposure FIGUR ES & TA BLE S 73 FI G U RE 53. Credit risk assessment   45 F I G U R E 69. Distribution of  64 methodologies used for respondents by issuers and counterparties geographic region, country income, and size FI G U RE 54 . Credit risk model used   46 of the reserves (US$, billions) FI G U RE 55. Limits used to manage  47 market risk TA B L E 1 0.1 .  Survey participants’ reserve levels and FI G U RE 56 . Inclusion of Environmental,  48 adequacy metrics Social, and Governance 65 (ESG) factors in the TA B L E 1 0. 2 . Number of staff supporting  investment policy reserve management by size of the reserves (US$, FI G U RE 57. Inclusion of ESG in   49 66 billions) the investment policy: individual esg factors TA B L E 1 0. 3 . Use of tranching by  geographic region, FI G U RE 58. Inclusion of ESG in the   49 country income group, investment policy by 67 size of the reserves (US$, geographic region billions), and exchange FI G U RE 59. Inclusion of ESG in the   50 rate regime investment policy by TA B L E 1 0. 4 . Tranche allocations in  country income group and reserve portfolios size of the reserves (US$, billions) TA B L E 1 0. 5 .  Average investment 68 horizon of the tranches FI G U RE 6 0.  Motivating factors to 51 (months) by incorporate ESG 68 geographic region, FI G U RE 6 1 .  Challenges to incorporating 52 country income group, sustainable investing size of the reserves (US$, billions) FI G U RE 6 2. Strategies used for ESG  53 implementation TA B L E 1 0.6.  Average duration of the tranches (months) by FI G U RE 6 3. Allocation of reserves to   54 geographic region, country 69 different types of ESG- income group, size of the labeled bonds reserves (US$, billions) FI G U RE 6 4 . ESG metrics monitored  55 TA B L E 1 0.7. Currency eligibility by   and/or reported geographic region, country income group, FI G U RE 6 5. Software source by   57 70 size of the reserves (US$, business area billions), and exchange rate regime FI G U RE 6 6 . Software deployment type  58 by business area TA B L E 1 0. 8 . Asset eligibility by   geographic region, FI G U RE 6 7. Systems’ time in   58 country income group, production 70 size of the reserves (US$, FI G U RE 6 8. Areas related to it  59 billions), and exchange that institutions are rate regime implementing or exploring for their reserve management operations Reserve Management Survey Report 2023 INSIGHTS INTO PUBLIC ASSET MANAGEMENT THE FOURTH EDITION