## _wp1399 — References

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---

### I. Introduction and market context
- Reserve holdings have risen fivefold over the past ten years with increases larger than that expected under traditional metrics.
- Reserves are projected to increase further as they broadly keep pace with trade and trade outgrows GDP.
- Reserves by now amount to the equivalent of one third of the OECD bond markets.
- Official reserves are projected to increase from the equivalent of 29 percent of OECD debt (issued by countries with CDS spreads under 200 bp) in 2011 to 38 percent by 2016.
- The bulk of reserves remain invested in dollars; the preferred habitat of reserves—high quality short-term government debt—has not kept pace with reserve increases.

### II. Survey scope and structure
- Survey conducted by IMF staff to understand lessons from the crisis and reserve managers’ practices on asset allocation, currency composition, maturity structures, and risk management.
- Survey sections covered:
  - Problems faced and core reactions (asset reallocations, risk management systems) and market implications.
  - Strategic asset allocation (currency composition, maturity structures, asset classes).
  - Short-term asset reallocation / rebalancing processes.
  - Forward-looking questions on potential changes.

### III. Summary of key findings — Crisis response
- Every advanced country (AC) in the sample reported experiencing at least some difficulties managing reserves during the crisis.
- Seven out of ten reserve managers changed their asset allocation.
- About half of all central banks pulled back on their level of commercial bank deposits in very high numbers.
- 35 percent of all respondents reduced exposure to unguaranteed bonds.
- Respondents reduced holdings of longer-term high-quality (AAA) bonds; early reductions in interest rate exposures proved costly as interest rates fell throughout the crisis.
- Half of respondents who reallocated considered potential inconsistent signaling to markets.
- Well over half would consider altering reserve management to address procyclicality; many European central banks would consider doing so.
- Most would consider holding a higher proportion of safer assets and applying more robust frameworks.
- MICs and LICs were open to coordination between central banks or via an international organization.
- Few reserve managers contacted the reserve-issuing central bank before reallocations; they more often contacted peers.

### IV. Box 1 — Procyclicality: evidence, triggers, and policy options
- Pre-crisis shifts into higher-yielding, higher-risk investments documented (securitizations, lesser quality sovereign bonds, deposits with lesser rated institutions).
- Central banks’ exposure to the banking sector was reduced by over $500 billion from July 2007 to March 2009.
- Survey evidence:
  - 80.0 percent: Rating downgrades triggered asset reallocation decisions.
  - 60.0 percent: Other awareness of increased credit risk.
  - 41.7 percent: Worsening CDS spreads.
  - 36.7 percent: Increased volatility.
  - 45.0 percent: Reputational risk.
- Measures taken (overall sample):
  - 70.1%: Immediate changes to asset allocation.
  - 65.7%: Strengthening risk management systems.
  - 41.8%: Use of reserves for liquidity or market intervention.
  - 29.9%: Building institutional capabilities.
  - 19.4%: Seeking other liquidity sources (e.g., currency swaps, regional cooperation).
  - 4.5%: No measures taken.
- Behavioral findings:
  - Only 11.8 percent favor longer holding periods during times of market stress.
  - 55.9 percent support adhering to risk frameworks better tested for tail risk.
  - Large majority agree to hold safer assets.
- Policy/practice recommendations to reduce procyclicality:
  - Focus on longer timeframes and tail risks.
  - Exploit flight-to-quality phenomena to reduce excessive procyclicality.
  - Reduce but not eliminate reliance on external credit ratings; complement with in-house systems acknowledging resource and through-the-cycle limitations.
  - Greater senior-level coordination within central banks to reconcile reserve management with financial stability objectives.
  - Favor gradual portfolio adjustments where warranted to avoid forced selling and market impact.

### V. Survey sample and crisis concerns (key statistics)
- Survey logistics:
  - All 156 reserve-managing central banks queried; survey sent in April 2012; responses by mid-June 2012.
  - 67 countries responded, response rate 43 percent, covering about half of global GDP and one third of reserves.
  - Average reserve holding of respondents: $66 billion.
  - Respondent composition: 23 ACs, 25 MICs, 19 LICs.
- Crisis difficulties reported (percent of respondents indicating each concern):
  - 80.6%: Credit risk of reserves.
  - 50.7%: Liquidity of reserves.
  - 37.3%: Composition of reserves.
  - 31.3%: Level of reserves.
  - 29.9%: Currency composition.
  - 14.9%: Other.
  - 9.0%: Did not experience any difficulties.

### VI. Strategic asset allocation — currency composition and shifts
- About half of respondents, holding about $2200 billion in reserves, said they are currently considering adjusting currency composition.
- Q8: 56.3% of respondents said "Yes" to considering adjustments (Total: 64 respondents).
- Q9: Types of currencies considered (39 respondents who answered):
  - 41.0%: Shifting among traditional reserve currencies (SDR basket: USD, GBP, EUR, JPY).
  - 74.4%: Holding other advanced country currencies (CHF, AUD, CAD, NZD, DKK, NOK, SEK).
  - 33.3%: Holding Chinese renminbi (onshore/offshore).
  - 30.8%: Holding other emerging market currencies.
- Commodity currencies (AUD, CAD) are of particular interest; these are seen as proxies for EMC currencies not yet widely investable.
- Q10: Of those considering EMC currencies (20 respondents):
  - 30.0%: Yes have already invested.
  - 70.0%: No have not invested.
  - MICs initiated reallocation toward renminbi/EMC currencies more than ACs; no LICs that indicated interest have made concrete moves.
- Q11: Reasons for not investing in renminbi/EMC currencies (27 respondents):
  - 40.7%: Not convertible.
  - 44.4%: FX markets not deep/liquid enough.
  - 40.7%: Underlying government bond markets not sufficiently liquid.
  - 18.5%: Cannot be counted as ‘Official Reserves’ in IMF datasets.
  - 14.8%: Credit risk considerations (ratings too low).
  - 37.0%: Quality of institutional framework/governance issues.
  - Operational challenges cited (opening local currency accounts, custodians, settlement, risk management).

### VII. Liquidity, tranching, and target duration
- Q12: Do you tranche reserves? (64 respondents)
  - Yes: 81.3% (AC 72.7% / MIC 82.6% / LIC 89.5%).
- Q13 (part 1): Main considerations determining relative tranche size (54 respondents):
  - Historical needs (e.g., interventions): 72.2% (AC 62.5% / MIC 71.4% / LIC 82.4%).
  - Central bank’s explicit liabilities: 57.4% (AC 43.8% / MIC 57.1% / LIC 70.6%).
  - Overall return target: 33.3% (AC 25.0% / MIC 33.3% / LIC 41.2%).
- Q13 (part 2): Determining target duration (65 respondents):
  - Overall return target: 50.8% (AC 45.5% / MIC 50.0% / LIC 57.9%).
  - Central bank’s explicit liabilities: 46.2% (AC 50.0% / MIC 45.8% / LIC 42.1%).
  - Projections about the level of reserves: 32.3% (AC 9.1% / MIC 25.0% / LIC 68.4%).
  - Few central banks set duration by flow liabilities (wages, currency refresh): 9.2%.
- Finding: Half of reserve managers use an overall return target to determine duration, potentially inducing very long-dated investments in low rate environments; LICs place greater weight on reserve projection considerations.

### VIII. Asset allocations and risk management changes (post-crisis)
- Asset types invested in (apart from gold) (64 respondents):
  - Longer-term government bonds: 73.4% (AC 72.7% / MIC 73.9% / LIC 73.7%).
  - Credit related securities: 60.9% (AC 68.2% / MIC 69.6% / LIC 42.1%).
  - Asset backed securities (ABS, MBS): 18.8%.
  - Equities: 14.1% (AC 31.8% / MIC 8.7% / LIC 0.0%).
  - REITs: 3.1% (AC 9.1%).
- 87.5% reported changing their risk management framework during or after the crisis (Total 64 respondents).
- Measures taken (60 respondents):
  - Introduced new risk measures: 78.3% (AC 71.4% / MIC 69.6% / LIC 100.0%).
  - Strengthened operational risk management: 51.7% (LIC 81.3%).
  - Reviewed/introduced legal risk measures (ISDAs/(G)MRAs): 35.0% (AC 66.7%).
  - Changed/canceled securities lending programmes: 28.3%.
- Credit risk management characteristics (67 respondents):
  - Size of limits linked to credit ratings or default probabilities: 80.6% (AC 91.3%).
  - 4 out of 5 rely on ratings as key instrument for assessing credit risk.
  - Minimum credit rating cut-off:
    - Broad “single A” category: 50.7% (AC 60.9% / MIC 36.0% / LIC 57.9%).
    - Broad “AA” category: 29.9%.
    - Broad “triple B” category: 17.9%.
  - When thresholds breached:
    - 38.8% require automatic cut within a time period.
    - 47.8% allow Governor/Committee discretion to decide case-by-case.
  - Sovereign bonds often treated differently from other debt in credit decisions.

### IX. Benchmarks, deviation limits, and rebalancing
- Interest rate benchmarks (67 respondents):
  - Standard Market Indices: 44.8%.
  - Customized Market Indices: 26.9%.
  - Fully customized in-house benchmarks: 25.4%.
  - Return target reference (e.g., relative to LIBOR): 25.4% (LIC 52.6%).
- Deviation limits around benchmarks:
  - Yes: 83.6% (AC 91.3% / MIC 84.0% / LIC 73.7%).
  - Purposes for deviations (57 respondents):
    - Active management: 86.0%.
    - Tactical asset allocation: 73.7%.
    - Market movements: 47.4%.
- Currency risk rebalancing frequency (63 respondents):
  - When preset threshold reached: 46.0% (AC 34.8% / MIC 43.5% / LIC 64.7%).
  - Monthly: 19.0%.
  - Daily: 9.5% (AC 17.4%).
  - Many wait until the maximum permitted deviation is reached before rebalancing; some rebalance to fractions of maximum deviation or exercise discretion.
- Execution when rebalancing (60 respondents):
  - Back to the benchmark: 56.7% (AC 66.7%).
  - Partial rebalancing to fractions of the maximum deviation: 11.6% combined.

### X. Drivers of currency composition changes (Q24)
- Main drivers (56 respondents):
  - Concerns at policy level about fundamental weakness of a currency: 58.9% (AC 44.4% / MIC 57.1% / LIC 76.5%).
  - Emergence of a market trend (e.g., moving averages): 14.3% (LIC 29.4%).
  - When stop-loss rules triggered: 3.6%.
  - Many reserve managers use ALM techniques: changes in liability composition drive asset composition changes.
  - Some reserve managers never adjust target composition or only in strategic reviews.

### XI. Practices to limit adverse impacts and structural responses (Q25–Q26)
- Preferred practices to limit risks (57 respondents):
  - Using more hedging instruments, such as inflation-indexed bonds: 49.1% (AC 50.0% / MIC 52.0% / LIC 44.4%).
  - Holding more gold: 17.5% (LIC 33.3%).
  - Diversifying exchange rate holdings to match revised risk profiles: 38.6% (AC 50.0%).
  - Creating SWFs or shifting balances to SWFs: 12.3%.
  - Reducing the level of reserves: 24.6%.
  - Pursuing increased exchange rate flexibility: 7.0% (LIC 11.1%).
- Practices when reserves are ample/excess (61 respondents):
  - Take more credit risk: 23.0%.
  - Take more liquidity risk: 34.4%.
  - Have a longer duration: 31.1% (LIC 47.4%).
  - Have a different currency composition: 16.4%.
  - Other / do not manage ample/excess reserves differently: 52.5% (AC 68.4%).
- Policy implications:
  - Majority favor hedging and holding safer assets to limit tail and liquidity risks.
  - Considerable support for diversifying currency holdings and better-tailored risk frameworks.
  - A substantive share would consider reducing reserve levels to lower exposure.
  - LICs show higher relative preference for gold and for extending duration when reserves are ample.

*Source: IMF staff survey and analysis as presented in the referenced document.*

### References .............................................................................................................

### _wp1399 - References

### I. Introduction — context and market implications
- Reserve holdings have risen fivefold over the past ten years with increases larger than that expected under traditional metrics.
- Trend of increased reserve levels was particularly noticeable in Emerging Market Countries (EMCs), especially in the BRICs (IMF, 2011) and in Switzerland.
- Reserves are projected to increase further as they broadly keep pace with trade and trade outgrows GDP.
- Reserves by now amount to the equivalent of one third of the OECD bond markets.
- The bulk of the reserves are invested in dollars, and their composition has not kept pace with the large shifts in the world economy.
- The size of the preferred habitat of reserves, high quality short-term government debt, also has not kept pace with the increase in reserves.
- Official reserves are projected to increase from the equivalent of 29 percent of OECD debt (issued by countries with CDS spreads under 200 bp) in 2011 to 38 percent by 2016.

### II. Survey scope and structure
- The paper reports on a survey conducted by IMF staff to understand lessons from the crisis and how reserve managers deal with asset allocation, currency composition, maturity structures, and risk management.
- Survey sections:
  - Problems reserve managers faced and core reactions (asset reallocations and risk management systems), and whether managers consider implications for global markets.
  - Strategic asset allocation decisions (currency composition, maturity structures, asset classes).
  - Short-term asset reallocation or rebalancing processes.
  - Forward-looking questions.

### III. Summary of key findings — Crisis response
- The deep crises of the last five years have brought out credit and liquidity problems in reserve portfolios.
- Every advanced country (AC) in the sample reported experiencing at least some difficulties with managing their reserves over the crisis.
- Seven out of ten reserve managers changed their asset allocation.
- About half of all central banks pulled back on their level of commercial bank deposits in very high numbers.
- 35 percent of all respondents reduced their exposure to unguaranteed bonds.
- Reserve managers reduced their holdings of longer-term high-quality (AAA) bonds; early reductions in interest rate exposures proved, with hindsight, relatively costly as interest rates fell throughout the crisis.
- Half of the respondents who engaged in asset reallocation considered the potential inconsistent signaling effects of their actions on markets.
- Well over half of reserve managers would consider altering reserve management practices to account for procyclicality issues; many European central banks would consider doing so.
- Most reserve managers would consider holding a higher proportion of safer assets and contemplate applying more robust frameworks.
- MICs and LICs were open to coordination between central banks or led by an international organization.
- Surprisingly few reserve managers contacted the central bank of the reserve issuing country before taking action on asset reallocations; they often talk to central banks facing similar issues.

### IV. Strategic asset allocation (currency and interest rate risk)
- About half of respondents, holding about $2200 billion in reserves, said they are currently considering adjusting the currency composition of their reserves.
- Many are contemplating shifts to advanced country currencies other than the traditional reserve currencies included in the SDR basket, with high interest expressed in commodity currencies such as AUD and CAD.
- Commodity currencies can be seen as a proxy for EMC currencies that are often not considered investable yet due to convertibility and illiquidity concerns.
- Especially MICs are considering investing in the Renminbi and other EMC currencies, but few have commenced doing so; several large reserve managers in MICs who intend to invest are still on the fence.
- ACs interested in exploring EMC currencies contemplate investing in the Renminbi more so than in other EMC currencies.
- More than four-fifths of reserve managers in the sample make use of the common practice of tranching (for investment purposes or to immunize liabilities); ACs make less use of tranching than MICs or LICs.
- Half the reserve managers surveyed use an overall return target to determine the duration of their reserve portfolios — which could lead to very long-dated investments in a low interest rate environment, and vice versa.
- Few central banks pay attention in setting duration targets to their flow liabilities (wages, refreshing currencies), despite these liabilities having very long duration characteristics.

### V. Risk management, benchmarks, and rebalancing
- New asset classes are gaining popularity; one in seven reserve managers are exposed to equity markets (especially in ACs).
- There is an increased focus on return complemented by improved risk management frameworks and new risk measures, with more importance placed on operational risk.
- Credit risk management systems remain heavily reliant on credit ratings.
  - 4 out of 5 reserve managers rely on ratings as the key instrument for assessing credit risk; CDS spreads are increasingly used as an additional signal.
  - A single ‘A’ rating from one of the main rating agencies is the most common cut-off used below which no exposures are permitted in reserve portfolios.
  - MICs are more conservative than LICs and ACs in choosing the rating cut-off.
- When a minimum credit rating trigger is breached, nearly half of respondents take the decision to cut or hold the position to senior management level.
  - ACs have more flexibility when minimum credit ratings are breached; a significant majority have the option to hold the position following approval from senior management, reducing exposure to procyclicality.
- Many reserve managers distinguish between sovereign bonds and other forms of debt in credit management decisions; sovereign rating downgrades are not automatically followed by forced selling.
- Active management of interest rate risk is widespread (virtually universal among ACs and very widespread among MICs and LICs).
- Rebalancing practices:
  - Rebalancing for currency risk is carried out by nearly half of reserve managers once a predetermined level of departure from the benchmark is reached.
  - A surprising number of reserve managers carry out rebalancing at relatively low frequencies.
  - Technical analysis plays only a minor role in currency decisions; a broader sense of currency weakness is an important consideration.

### VI. New initiatives and fundamental solutions
- Reserve managers favor initiatives to limit adverse impacts of risk factors, with a preference for more hedging instruments.
- Nearly one-quarter of respondents feel that reducing the outright level of reserves would be beneficial to reduce risk factors.
- One in ten reserve managers are considering creating Sovereign Wealth Funds (SWFs) or shifting balances to SWFs.
- LICs have a relatively higher preference for investing in gold to shield portfolios from potential risk factors; concern exists that gold demand could be driven by backward-looking motives.

*Source: IMF staff survey and analysis as presented in the referenced document.*

### Box 1. Procyclicality—Reserve Management vs. Financial Stability

### Box 1. Procyclicality—Reserve Management vs. Financial Stability

### Evidence of procyclicality in reserve management
- Pre-crisis shift into higher-yielding, higher-risk investments including securitizations, lesser quality sovereign bonds, and deposits with lesser rated financial institutions (Wooldridge (2006); Borio, Galati, Heath (2008)).
- Central banks’ exposure to the banking sector was reduced by over $500 billion over the period July 2007 to March 2009 (Pihlman and van der Hoorn, 2010).
- Respondents: “half of them pulled back on their level of commercial bank deposits as the crisis progressed.”
- Survey finds 80 percent of asset reallocation decisions were triggered by rating downgrades.
- Survey behavioral statistics:
  - Only 11.8 percent of reserve managers favor longer holding periods for assets during times of market stress.
  - 55.9 percent consider it appropriate to adhere to risk frameworks that are better tested for tail risk.
  - A large majority agree to hold safer assets (qualitative finding).

### Triggers and crisis responses (survey evidence)
- Primary triggers for asset reallocation:
  - 80.0 percent: Rating downgrades.
  - 60.0 percent: Other sources of awareness of increased credit risk.
  - 41.7 percent: Worsening CDS spreads.
  - 36.7 percent: Increased volatility.
  - 45.0 percent: Reputational risk.
- Measures taken to address concerns (overall sample):
  - 70.1%: Immediate changes to asset allocation.
  - 65.7%: Strengthening risk management system.
  - 41.8%: Use of reserves to provide liquidity or market intervention.
  - 29.9%: Building of institutional capabilities.
  - 19.4%: Seeking other sources of liquidity (e.g., currency swaps, regional cooperation).
  - 4.5%: No measures taken.
- If changed asset allocation, assets actively reduced (share of respondents who reduced exposure):
  - 73.2%: Deposits with commercial banks.
  - 53.6%: Bonds without government guarantee (e.g., Agency, ABS, MBS, Corporate bonds).
  - 42.9%: Government bonds that were downgraded.
  - 41.1%: Non-Core European government bonds.
  - 8.9%: Longer-term AAA government bonds.
  - 5.4%: AA+/AA/AA- rated government bonds.
  - 3.6%: Equity.

### Risk management, ratings, and structural considerations
- Credit rating reliance and consequences:
  - Rating downgrades can trigger forced selling via sovereign bond index exclusions and investment policy thresholds, leading to portfolio reallocation and concentration.
  - Internal investment policy guidelines referencing ratings can cause forced selling and reduced diversification.
  - Downgrades of counterparties restricted trading and deposit counterparties, increasing concentration and potentially affecting broker competition and trade pricing.
- Alternative approaches and limitations:
  - One respondent developed an in-house credit risk system with reduced reliance on credit ratings.
  - Caveat noted: in-house systems require significant investment in human resources, IT capabilities and frequent updates; credit rating agencies aim to rate through the cycle, and in-house systems may aim for a lower standard, possibly worsening procyclicality.
  - “Reducing reliance on ratings could help stem procyclical divestments but should not be considered a panacea.”
- Internal coordination:
  - Only half of reserve managers who engaged in asset reallocation considered the potential inconsistent signaling effects of their actions.
  - Views evenly split on altering reserve management practices to account for procyclicality issues.
  - Recommendation: greater interaction at senior management (possibly Board) level within central banks to consider conflicts between reserve management and financial stability mandates rather than relying solely on rules-based reserve management.

### Behavioral and market effects observed
- Many reserve managers moved toward safe-haven assets as the crisis intensified; sovereign bond yields and CDS spreads rose dramatically for sovereigns under stress.
- Safe-haven scarcity and price effects:
  - Increased demand for traditional highly liquid asset classes; some bonds trading at negative yields.
  - High demand for safe assets can lead to lower interest rates and force other market participants to chase yields elsewhere, with attendant financial stability issues.
- Gradual versus immediate reallocation:
  - Some reserve managers adopted gradual changes to allocations rather than immediate shifts, which may have reduced procyclical effects.
  - Reasons for gradual adjustments:
    - Avoiding realization of large losses from forced selling in falling markets.
    - Hold-to-maturity (HTM) positions preclude sale before maturity; mark-to-market (MTM) accounting documents current prices.
    - Reputational risk concerns about reporting portfolio losses.
    - Selling large volumes in thin markets could exacerbate price declines.

### Survey sample and context (key statistics)
- Survey logistics:
  - All 156 reserve managing central banks of IMF member countries were requested to respond.
  - Survey sent in April 2012 with all responses received by mid-June 2012.
  - 67 countries responded, a response rate of 43 percent, covering countries accounting for about half of global GDP and one third of reserves.
  - Average reserve holding of respondents was $66 billion.
- Respondent composition:
  - 23 were ACs, 25 were MICs, and 19 were LICs.
  - 6 LICs included have a population of less than 1 million.
- Crisis difficulties reported (percent of respondents indicating each concern):
  - 80.6%: Credit risk of reserves.
  - 50.7%: Liquidity of reserves.
  - 37.3%: Other issues relating to the composition of reserves.
  - 31.3%: Level of reserves.
  - 29.9%: Currency composition.
  - 14.9%: Other.
  - 9.0%: Did not experience any difficulties.

### Policy options and practices highlighted
- Practices that could reduce procyclicality:
  - Focus on longer timeframes to evaluate risks.
  - Place more emphasis on tail risks.
  - Exploit flight-to-quality phenomena to reduce excessive procyclicality.
  - Adhere to risk frameworks better tested for tail risk (55.9 percent support in survey).
  - Hold safer assets (majority preference reported).
  - Reduce but not eliminate reliance on external credit ratings; consider complementing with in-house systems while recognizing resource and through-the-cycle limitations.
  - Greater senior-level coordination within central banks to reconcile reserve management actions with financial stability objectives.
  - Favor gradual portfolio adjustments where warranted to avoid forced selling, price impact in thin markets, and reputational loss reporting.

*Source: Box 1. Procyclicality—Reserve Management vs. Financial Stability (survey results and discussion) from the supplied PDF content.*

### 5.      When you made immediate changes to asset allocation, did you consider any of

### _wp1399 - 5.      When you made immediate changes to asset allocation, did you consider any of

### Immediate changes to asset allocation — considerations and responses
- Survey question: "When you made immediate changes to asset allocation, did you consider any of the following?"
- Number of respondents: 50 total; 15 AC; 20 MIC; 15 LIC.
- Responses (percentages by choice and subgroup):
  - 1 Potential inconsistent signaling effects (i.e. risk reduction/flight to quality in reserves, while at the same time trying to calm the markets)
    - Total: 52.0%
    - AC: 86.7%
    - MIC: 40.0%
    - LIC: 33.3%
  - 2 Contacting other reserve managers potentially facing similar issues
    - Total: 46.0%
    - AC: 40.0%
    - MIC: 40.0%
    - LIC: 60.0%
  - 3 Effects on banking sector liquidity and global financial stability (assuming other reserve managers were doing the same)
    - Total: 38.0%
    - AC: 40.0%
    - MIC: 35.0%
    - LIC: 40.0%
  - 4 Contacting the reserve currency issuing central banks (e.g., Fed, ECB, BoJ, or BoE) ahead of the actions
    - Total: 8.0%
    - AC: 13.3%
    - MIC: 5.0%
    - LIC: 6.7%
  - 5 Other
    - Total: 16.0%
    - AC: 6.7%
    - MIC: 20.0%
    - LIC: 20.0%

- Key finding: ACs were much more likely to consider potential inconsistent signaling effects of their actions; LICs were more likely to contact other reserve managers. ACs’ greater concern may reflect larger reserve portfolio sizes and proportionally higher market impact. MICs tended toward LIC behavior on signaling effects.

### Procyclicality concerns and possible changes to reserve/risk management
- Survey question (Q6(1)): "If you are concerned about the implications of asset allocations in banking sector liquidity and global financial stability, would you consider altering your reserve/risk management practices to reduce procyclicality?"
  - Number of respondents: 56 total; 21 AC; 22 MIC; 13 LIC.
  - Responses:
    - 1 Yes
      - Total: 55.4%
      - AC: 57.1%
      - MIC: 45.5%
      - LIC: 69.2%
      - LIC ex SC: 55.6%
    - 2 No
      - Total: 44.6%
      - AC: 42.9%
      - MIC: 54.5%
      - LIC: 30.8%
      - LIC ex SC: 44.4%
- Interpretation: 31 out of 56 reserve managers would consider altering reserve management practices to account for procyclicality issues. Many European central banks would consider doing so, although not all.

- Survey question (Q6(2)): "If 'yes,' what (policy) actions would you consider appropriate?"
  - Number of respondents: 34 total; 13 AC; 11 MIC; 10 LIC.
  - Responses (percentages by choice and subgroup):
    - 1 Coordination with other central banks
      - Total: 44.1%
      - AC: 30.8%
      - MIC: 54.5%
      - LIC: 50.0%
    - 2 Coordination facilitated by an international organization
      - Total: 38.2%
      - AC: 15.4%
      - MIC: 54.5%
      - LIC: 50.0%
    - 3 Adhering to frameworks that are more robust and better tested for tail risk
      - Total: 55.9%
      - AC: 61.5%
      - MIC: 63.6%
      - LIC: 40.0%
    - 4 Adhering to more strict procedures (e.g., involving senior management) before such decisions are taken
      - Total: 41.2%
      - AC: 23.1%
      - MIC: 36.4%
      - LIC: 70.0%
    - 5 Longer holding periods during times of generalized market stress
      - Total: 11.8%
      - AC: 23.1%
      - MIC: 0.0%
      - LIC: 10.0%
    - 6 Greater allocation of reserves to long-term assets
      - Total: 8.8%
      - AC: 7.7%
      - MIC: 0.0%
      - LIC: 20.0%
    - 7 Holding more safe assets
      - Total: 73.5%
      - AC: 61.5%
      - MIC: 72.7%
      - LIC: 90.0%
    - 8 Other
      - Total: 14.7%
      - AC: 23.1%
      - MIC: 9.1%
      - LIC: 10.0%

- Key findings and interpretation:
  - The most popular policy response is to hold a higher proportion of safer assets (Total: 73.5%), indicating a retreat from perceived risky assets to traditional safe havens to shield portfolios from credit and liquidity risk.
  - Many central banks selected multiple actions (often three or four).
  - Majority emphasized robust frameworks capable of withstanding tail risk (Total: 55.9%).
  - MICs and LICs are more open to coordination facilitated by an international organization than ACs; MICs and LICs also favor stricter procedures before asset relocation decisions. ACs may prefer coordination among themselves or already have stricter procedures in place.

### Strategic asset allocation — currency composition considerations
- Survey question (Q7): "What are the main considerations in determining your currency composition?"
  - Number of respondents: 66 total; 23 AC; 24 MIC; 19 LIC.
  - Responses (percentages by choice and subgroup):
    - 1 Currency composition of central bank’s overall foreign currency liabilities
      - Total: 48.5%
      - AC: 39.1%
      - MIC: 54.2%
      - LIC: 52.6%
    - 2 Currency composition of central government’s short-term foreign currency liabilities
      - Total: 39.4%
      - AC: 17.4%
      - MIC: 41.7%
      - LIC: 63.2%
    - 3 Currency composition of central government’s overall external liabilities
      - Total: 40.9%
      - AC: 17.4%
      - MIC: 54.2%
      - LIC: 52.6%
    - 4 Currency composition of the maturity mismatch in banks’ FX book
      - Total: 4.5%
      - AC: 13.0%
      - MIC: 0.0%
      - LIC: 0.0%
    - 5 Currency composition of the economy’s (short term) external liabilities
      - Total: 28.8%
      - AC: 17.4%
      - MIC: 20.8%
      - LIC: 52.6%
    - 6 Trade composition (e.g., the composition of imports)
      - Total: 40.9%
      - AC: 17.4%
      - MIC: 50.0%
      - LIC: 57.9%
    - 7 The currency/currencies to which your currency is pegged or closely related
      - Total: 30.3%
      - AC: 8.7%
      - MIC: 37.5%
      - LIC: 47.4%
    - 8 Depth and liquidity of the underlying asset markets (e.g., government bond markets)
      - Total: 50.0%
      - AC: 82.6%
      - MIC: 45.8%
      - LIC: 15.8%
    - 9 Depth and liquidity of the FX markets (e.g., ability to run a swap book)
      - Total: 31.8%
      - AC: 47.8%
      - MIC: 25.0%
      - LIC: 21.1%
    - 10 The nominal interest rate
      - Total: 21.2%
      - AC: 17.4%
      - MIC: 16.7%
      - LIC: 31.6%
    - 11 Access to a Federal Reserve System or ECB swap line
      - Total: 0.0%
      - AC: 0.0%
      - MIC: 0.0%
      - LIC: 0.0%
    - 12 Other
      - Total: 13.6%
      - AC: 26.1%
      - MIC: 12.5%
      - LIC: 0.0%

- Interpretation:
  - ACs: Nearly all ACs are concerned about depth and liquidity of underlying asset markets (AC: 82.6%) and to some extent FX market liquidity. ACs hold large market positions and require liquidity for intervention capacity.
  - LICs: Rely more on structural factors — currency composition of central bank and government external liabilities, trade composition, and currency pegs.
  - MICs: Motives closer to LICs; surprising limited emphasis on economies' short-term external liabilities per the Greenspan–Guidotti considerations.

- Additional factors mentioned (open question): expected macroeconomic developments, credit quality of issuing country, volatility of the accounting currency.

### Considering adjustments to currency composition (Q8–Q10)
- Q8: "Are you currently considering adjusting the currency composition of your reserves?"
  - Number of respondents: 64 total; 22 AC; 23 MIC; 19 LIC.
  - Responses:
    - 1 Yes
      - Total: 56.3%
      - AC: 59.1%
      - MIC: 56.5%
      - LIC: 52.6%
    - 2 No
      - Total: 43.8%
      - AC: 40.9%
      - MIC: 43.5%
      - LIC: 47.4%
  - Note: Over half of respondents, with reserves of about $ 2200 billion, state they are considering adjusting currency composition.

- Q9: "If 'Yes,' what types of currencies are you considering?"
  - Number of respondents: 39 total; 14 AC; 15 MIC; 10 LIC.
  - Responses:
    - 1 Shifting composition between traditional reserve currencies (those included in the SDR basket, USD, GBP, EUR, JPY)
      - Total: 41.0%
      - AC: 35.7%
      - MIC: 33.3%
      - LIC: 60.0%
    - 2 Holding other advanced country currencies, such as CHF, AUD, CAD, NZD, DKK, NOK, SEK
      - Total: 74.4%
      - AC: 71.4%
      - MIC: 73.3%
      - LIC: 80.0%
    - 3 Holding Chinese renminbi (onshore/offshore)
      - Total: 33.3%
      - AC: 35.7%
      - MIC: 40.0%
      - LIC: 20.0%
    - 4 Holding other emerging market currencies
      - Total: 30.8%
      - AC: 14.3%
      - MIC: 46.7%
      - LIC: 30.0%

- Interpretation:
  - Majority looking into increasing holdings of other advanced country currencies (Total: 74.4%), amounting to over $1700 billion in reserves held by those respondents.
  - Commodity currencies (AUD, CAD) are of particular interest.
  - Roughly a third of those considering adjustments (20 percent of total respondents) are actively considering increasing renminbi weight; a similar fraction considering other emerging market currencies.

- Q10: "If you answered 'Yes' to 3) and/or 4) above, have you already invested in these currencies?"
  - Number of respondents: 20 total; 7 AC; 7 MIC; 6 LIC.
  - Responses:
    - 1 Yes
      - Total: 30.0%
      - AC: 28.6%
      - MIC: 57.1%
      - LIC: 0.0%
    - 2 No
      - Total: 70.0%
      - AC: 71.4%
      - MIC: 42.9%
      - LIC: 100.0%

- Interpretation:
  - Just 6 countries, holding about $500 billion in reserves, have already invested in renminbi or other EMC currencies; 19 countries holding nearly $1600 billion are considering investing.
  - MICs have initiated currency reallocation toward renminbi and EMC currencies more than ACs; no LIC that indicated interest has made concrete moves.
  - Operational challenges noted (opening local currency bank accounts, settling trades with local custodians, additional risk management challenges).

### Reasons for not investing in renminbi or other EM currencies (Q11)
- Number of respondents: 27 total; 9 AC; 7 MIC; 11 LIC.
- Main reasons (percentages by choice and subgroup):
  - 1 The currencies are not convertible
    - Total: 40.7%
    - AC: 33.3%
    - MIC: 57.1%
    - LIC: 36.4%
  - 2 The currencies cannot be counted as ‘Official Reserves’ in IMF datasets
    - Total: 18.5%
    - AC: 0.0%
    - MIC: 28.6%
    - LIC: 27.3%
  - 3 The currencies are too volatile to invest currently
    - Total: 11.1%
    - AC: 0.0%
    - MIC: 14.3%
    - LIC: 18.2%
  - 4 The FX markets in these currencies are not deep and liquid enough
    - Total: 44.4%
    - AC: 11.1%
    - MIC: 57.1%
    - LIC: 63.6%
  - 5 Credit risk considerations (ratings that are too low)
    - Total: 14.8%
    - AC: 0.0%
    - MIC: 14.3%
    - LIC: 27.3%
  - 6 The underlying government bond markets are not sufficiently liquid
    - Total: 40.7%
    - AC: 33.3%
    - MIC: 57.1%
    - LIC: 36.4%
  - 7 Quality of institutional framework, governance issues
    - Total: 37.0%
    - AC: 11.1%
    - MIC: 28.6%
    - LIC: 63.6%
  - 8 Peers have not yet entered into these markets
    - Total: 14.8%
    - AC: 11.1%
    - MIC: 14.3%
    - LIC: 18.2%
  - 9 Other
    - Total: 44.4%
    - AC: 88.9%
    - MIC: 14.3%
    - LIC: 27.3%

- Key findings:
  - Main reasons: lack of liquidity and depth in FX and government bond markets (Total: 44.4% for FX markets; 40.7% for bond markets), and non-convertibility (Total: 40.7%).
  - Other noted reasons: operational unfamiliarity, lack of experience with the currency (onshore/offshore renminbi access), and the currency not being in the SDR basket for some respondents.
  - Many reserve managers are studying currency reallocation issues further before making decisions.

### Liquidity and interest rate risk — tranching and target duration
- Q12: "Do you tranche reserves into portfolios with different objectives (e.g. liquidity and investment portfolios)?"
  - Number of respondents: 64 total; 22 AC; 23 MIC; 19 LIC.
  - Responses:
    - 1 Yes
      - Total: 81.3%
      - AC: 72.7%
      - MIC: 82.6%
      - LIC: 89.5%
    - 2 No
      - Total: 18.8%
      - AC: 27.3%
      - MIC: 17.4%
      - LIC: 10.5%

- Findings:
  - More than four-fifths of reserve managers use tranching to split portfolios by liquidity and investment objectives.
  - ACs make slightly less use of tranching than MICs or LICs; possibly because ACs may not need frequent intervention liquidity and have risk systems focused on overall benchmarks.

- Q13 (part 1): "If you answered 'Yes' to question 12 above, what are the main considerations in determining the relative size of these portfolios?"
  - Number of respondents: 54 total; 16 AC; 21 MIC; 17 LIC.
  - Responses:
    - 1 Central bank’s explicit liabilities
      - Total: 57.4%
      - AC: 43.8%
      - MIC: 57.1%
      - LIC: 70.6%
    - 2 Historical needs (e.g., interventions)
      - Total: 72.2%
      - AC: 62.5%
      - MIC: 71.4%
      - LIC: 82.4%
    - 3 Overall return target
      - Total: 33.3%
      - AC: 25.0%
      - MIC: 33.3%
      - LIC: 41.2%
    - 4 Transaction costs
      - Total: 7.4%
      - AC: 0.0%
      - MIC: 9.5%
      - LIC: 11.8%
    - 5 Other
      - Total: 29.6%
      - AC: 31.3%
      - MIC: 38.1%
      - LIC: 17.6%

- Interpretation:
  - Historical factors (interventions) are the dominant determinant of tranche sizes (Total: 72.2%).
  - More than half cite central bank explicit liabilities (Total: 57.4%), indicating immunization concerns.
  - MICs and LICs place more emphasis than ACs on central bank explicit liabilities.

- Q13 (part 2): "What are the main considerations in determining the target duration for the reserves portfolio?"
  - Number of respondents: 65 total; 22 AC; 24 MIC; 19 LIC.
  - Responses:
    - 1 Central bank’s explicit liabilities
      - Total: 46.2%
      - AC: 50.0%
      - MIC: 45.8%
      - LIC: 42.1%
    - 2 Projections about the level of reserves
      - Total: 32.3%
      - AC: 9.1%
      - MIC: 25.0%
      - LIC: 68.4%
    - 3 Overall return target
      - Total: 50.8%
      - AC: 45.5%
      - MIC: 50.0%
      - LIC: 57.9%
    - 4 Central banks’ nominal liabilities (expenditures on wages etc.)
      - Total: 9.2%
      - AC: 9.1%
      - MIC: 8.3%
      - LIC: 10.5%
    - 5 Other
      - Total: 36.9%
      - AC: 45.5%
      - MIC: 41.7%
      - LIC: 21.1%

- Findings and interpretation:
  - Half of reserve managers use an overall return target to determine duration (Total: 50.8%). This is often intended to avoid negative income or to preserve capital by setting a return target minimizing chance of negative return.
  - For LICs, adequacy/projections about the level of reserves are the largest driver of duration (LIC: 68.4%).
  - Few central banks pay attention to flow liabilities (wages, currency refresh) when determining duration; calculating net present value of central bank liabilities is not well established.
  - Methods mentioned for determining target duration include Asset and Liability Management (ALM) techniques and the shortfall approach; issuance of liabilities to achieve desired asset composition and considerations of overall risk appetite and government liabilities are also noted.

*Source: content unit from the supplied IMF PDF excerpt*

### 14.      What types of assets are you investing in (apart from gold) to enhance your rate

### _wp1399 - 14.      What types of assets are you investing in (apart from gold) to enhance your rate

### Asset allocations reported (apart from gold)
- Longer-term government bonds: Total 73.4% / AC 72.7% / MIC 73.9% / LIC 73.7%
- Credit related securities (e.g., agency and corporate bonds): Total 60.9% / AC 68.2% / MIC 69.6% / LIC 42.1%
- Asset backed securities (e.g., ABS and MBS): Total 18.8% / AC 13.6% / MIC 26.1% / LIC 15.8%
- REITs: Total 3.1% / AC 9.1% / MIC 0.0% / LIC 0.0%
- Equities: Total 14.1% / AC 31.8% / MIC 8.7% / LIC 0.0%
- Other: Total 32.8% / AC 22.7% / MIC 30.4% / LIC 47.4%
- Number of respondents: Total 64 / AC 22 / MIC 23 / LIC 19

### Key findings on asset choice and motivations
- Reserve managers have shifted toward longer dated government bonds and credit related securities to gain yield pickup and enhance returns in a low interest environment.
- One in seven reserve managers is exposed to the equity markets, despite equities not traditionally being part of reserve portfolios.
- REITs remain barely used despite favorable long-term inflation protection properties.
- A sizable minority use securitizations to increase rates of return, but the proportion has barely grown in recent years due to crisis-era problems.
- Cross-country patterns:
  - One third of ACs is invested in equities and one tenth has exposure to REITs; none of the LICs surveyed invest in equities or REITs.
  - The percentage of LICs invested in securitized products is relatively close to that of ACs.
  - MICs are more invested in securitized products than ACs but have minimal equity and REIT exposure.

### Other asset types mentioned by respondents (open answers)
- Supranational bonds
- Longer term Certificates of Deposits and Commercial Papers
- Dual currency deposits
- Covered bonds and callable bonds
- TIPS and floating rate debt used by at least one respondent to raise levels of return

### Risk management, benchmarks, and rebalancing — overview
- Have you changed your risk management framework during or after the crisis?
  - Yes: Total 87.5% / AC 90.9% / MIC 87.0% / LIC 84.2%
  - No: Total 12.5% / AC 9.1% / MIC 13.0% / LIC 15.8%
  - Number of respondents: Total 64 / AC 22 / MIC 23 / LIC 19

### Measures taken to enhance risk management (if “Yes”)
- Strengthened management of operational risk: Total 51.7% / AC 33.3% / MIC 47.8% / LIC 81.3%
- Reviewed/introduced new legal risk management measures (ISDAs, (G)MRAs): Total 35.0% / AC 66.7% / MIC 26.1% / LIC 6.3%
- Tightened monitoring of external managers: Total 26.7% / AC 14.3% / MIC 30.4% / LIC 37.5%
- Changed/canceled securities lending programmes: Total 28.3% / AC 42.9% / MIC 34.8% / LIC 0.0%
- Introduced new risk measures: Total 78.3% / AC 71.4% / MIC 69.6% / LIC 100.0%
- Other: Total 26.7% / AC 33.3% / MIC 39.1% / LIC 0.0%
- Number of respondents: Total 60 / AC 21 / MIC 23 / LIC 16

- Main emphases: introduction of new risk measures and strengthening operational risk management; diversity in sophistication from counterparty limits to dedicated risk units and formal credit committees.

### Credit risk management framework characteristics
- The size of limits are linked to credit ratings or default probabilities: Total 80.6% / AC 91.3% / MIC 68.0% / LIC 84.2%
- Other considerations besides credit quality (e.g., capital, market capitalization) used: Total 55.2% / AC 69.6% / MIC 56.0% / LIC 36.8%
- Minimum credit rating cut-off in the broad “AA” category: Total 29.9% / AC 13.0% / MIC 44.0% / LIC 31.6%
- Minimum credit rating cut-off in the broad “single A” category: Total 50.7% / AC 60.9% / MIC 36.0% / LIC 57.9%
- Minimum credit rating cut-off in the broad “triple B” category: Total 17.9% / AC 26.1% / MIC 12.0% / LIC 15.8%
- When threshold reached, exposure needs to be automatically cut within a certain time period: Total 38.8% / AC 30.4% / MIC 52.0% / LIC 31.6%
- When threshold reached, Governor or Committee can decide case-by-case whether to hold position: Total 47.8% / AC 65.2% / MIC 36.0% / LIC 42.1%
- Other: Total 13.4% / AC 26.1% / MIC 12.0% / LIC 0.0%
- Number of respondents: Total 67 / AC 23 / MIC 25 / LIC 19

- Key points:
  - 4 out of 5 rely on ratings as a key instrument for assessing credit risk.
  - A single ‘A’ rating is the most common cut-off below which no exposures are permitted, followed by AA and then B.
  - MICs tend to use more conservative rating cut-offs than ACs and LICs.
  - Nearly half of respondents allow senior management discretion to hold downgraded positions; just under two-fifths require automatic cuts within a set time period.
  - Sovereign bonds are often treated differently from other debt in credit decision processes.

### Interest rate benchmarks used
- Standard Market Indices: Total 44.8% / AC 26.1% / MIC 56.0% / LIC 52.6%
- Customized Market Indices: Total 26.9% / AC 43.5% / MIC 20.0% / LIC 15.8%
- Fully customized in-house built and maintained benchmarks: Total 25.4% / AC 43.5% / MIC 12.0% / LIC 21.1%
- Return target (e.g., relative to a reference rate such as LIBOR): Total 25.4% / AC 13.0% / MIC 16.0% / LIC 52.6%
- Other: Total 4.5% / AC 0.0% / MIC 12.0% / LIC 0.0%
- Number of respondents: Total 67 / AC 23 / MIC 25 / LIC 19

- Observations:
  - Almost half use standard market indices; about half use either customized indices or fully customized in-house benchmarks.
  - One in four has an explicit return target; over half of LICs use a return target as their interest benchmark.

### Deviation limits around benchmarks
- Do you have deviation limits around the benchmark?
  - Yes: Total 83.6% / AC 91.3% / MIC 84.0% / LIC 73.7%
  - No: Total 16.4% / AC 8.7% / MIC 16.0% / LIC 26.3%
  - Number of respondents: Total 67 / AC 23 / MIC 25 / LIC 19

- Purposes for deviations (if “Yes”):
  - Market movements: Total 47.4% / AC 52.4% / MIC 36.4% / LIC 57.1%
  - Tactical asset allocation: Total 73.7% / AC 71.4% / MIC 81.8% / LIC 64.3%
  - Active management: Total 86.0% / AC 90.5% / MIC 86.4% / LIC 78.6%
  - Other: Total 5.3% / AC 4.8% / MIC 4.5% / LIC 7.1%
  - Number of respondents: Total 57 / AC 21 / MIC 22 / LIC 14

- Insight: Active management is the most common raison d’être for deviation limits, followed by tactical asset allocation and exploiting market movements.

### Currency risk rebalancing practices
- How often do you rebalance for currency risk? (Number of respondents: Total 63 / AC 23 / MIC 23 / LIC 17)
  - Daily: Total 9.5% / AC 17.4% / MIC 8.7% / LIC 0.0%
  - Weekly: Total 3.2% / AC 0.0% / MIC 4.3% / LIC 5.9%
  - Monthly: Total 19.0% / AC 13.0% / MIC 17.4% / LIC 29.4%
  - When a preset threshold/limit for the deviation from the benchmark is reached: Total 46.0% / AC 34.8% / MIC 43.5% / LIC 64.7%
  - Other: Total 47.6% / AC 56.5% / MIC 47.8% / LIC 35.3%

- Thresholds for rebalancing when preset limit used (Number of respondents: Total 33 / AC 11 / MIC 11 / LIC 11)
  - The maximum deviation: Total 54.5% / AC 45.5% / MIC 72.7% / LIC 45.5%
  - When the portfolio hits a level of no more than two-thirds of the maximum deviation: Total 9.1% / AC 9.1% / MIC 0.0% / LIC 18.2%
  - When the portfolio hits a level of no more than one-third of the maximum deviation: Total 6.1% / AC 0.0% / MIC 0.0% / LIC 18.2%

- How rebalancing is executed (Number of respondents: Total 60 / AC 21 / MIC 22 / LIC 17)
  - Back to the benchmark: Total 56.7% / AC 66.7% / MIC 54.5% / LIC 47.1%
  - To a point that is less than two thirds of the maximum deviation from the benchmark: Total 3.3% / AC 0.0% / MIC 0.0% / LIC 11.8%
  - To a point that is less than one thirds of the maximum deviation from the benchmark: Total 8.3% / AC 0.0% / MIC 4.5% / LIC 23.5%
  - Other: Total 38.3% / AC 38.1% / MIC 50.0% / LIC 23.5%

- Key observations:
  - Nearly half rebalance when a preset deviation threshold is reached; about one third rebalance monthly or more often.
  - A surprising number (about 1 in 6) rebalance at lower frequencies (quarterly or annually).
  - Many that do not rebalance explain reserves are primarily or fully in a single currency.
  - Most wait until the maximum permitted deviation is reached before rebalancing; LICs show somewhat more cautious behavior by rebalancing earlier in some cases.
  - Most rebalance back to the benchmark, though a notable subset rebalances only partly (to fractions of the maximum deviation) or exercise discretion based on market conditions.

*Source: IMF staff survey responses and analysis contained in the provided content.*

### 24.      What other elements trigger a change in the currency composition? Please check

### 24. What other elements trigger a change in the currency composition? Please check all that apply.

### Main drivers of currency composition changes
- High level policy concerns regarding the fundamental weakness of a currency are the principal reasons for a change in currency composition.
- Technical signals and market trends are also cited, especially by some country groups.
- Some reserve managers never adjust their target currency composition (single currency targets) or only consider currency composition changes as part of strategic long term reviews.
- Reserve managers that use ALM techniques focus on changes in the composition of liabilities as a driver for asset side changes.
- Other relevant factors include changes in the SDR basket and active management decisions (strategic benchmark deviation bands) for some managers.

### Survey results (Choice shares by respondent group)
- 1 The emergence of a market trend (e.g., the spot exchange rate moves above the 50- or 200- day moving average): 14.3% total, 5.6% AC, 9.5% MIC, 29.4% LIC
- 2 Concerns at the policy level about the fundamental weakness of a currency: 58.9% total, 44.4% AC, 57.1% MIC, 76.5% LIC
- 3 When stop-loss rules (based on the exchange rate level) are triggered: 3.6% total, 5.6% AC, 4.8% MIC, 0.0% LIC
- 4 Other: 41.1% total, 55.6% AC, 52.4% MIC, 11.8% LIC
- Number of respondents: 56 total, 18 AC, 21 MIC, 17 LIC

### Observations by country group
- LICs: Over three-quarters factor in concerns regarding the weakness of a currency (76.5%); LICs also place relatively more weight on technical analysis (e.g., market trend signals) than other groups.
- ACs and MICs: Place less weight on policy-level concerns than LICs but still consider them a major driver. ACs show higher incidence of "Other" reasons and greater use of active management bands.
- Some respondents emphasize no active foreign exchange market positions; currency composition changes occur only in strategic reviews.

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### 25. What practices could central banks adopt to limit the adverse impact of potential risk factors?

### Preferred practices and their prevalence
- 1 Using more hedging instruments, such as inflation-indexed bonds: 49.1% total, 50.0% AC, 52.0% MIC, 44.4% LIC
- 2 Holding more gold: 17.5% total, 7.1% AC, 12.0% MIC, 33.3% LIC
- 3 Creating SWFs or shifting balances to existing SWFs: 12.3% total, 14.3% AC, 12.0% MIC, 11.1% LIC
- 4 Diversifying exchange rate holdings to match revised risk profiles: 38.6% total, 50.0% AC, 40.0% MIC, 27.8% LIC
- 5 Pursuing increased exchange rate flexibility: 7.0% total, 0.0% AC, 8.0% MIC, 11.1% LIC
- 6 Reducing the level of reserves: 24.6% total, 21.4% AC, 24.0% MIC, 27.8% LIC
- 7 Other: 19.3% total, 21.4% AC, 16.0% MIC, 22.2% LIC
- Number of respondents: 57 total, 14 AC, 25 MIC, 18 LIC

### Analytical findings and policy implications
- The most commonly endorsed practice is using more hedging instruments (49.1%) to limit portfolio risk, including tail risks such as an increase in inflation.
- Diversifying exchange rate holdings to better match current risk profiles is supported by over one-third of respondents (38.6%), aligning with preferences to invest in non-SDR currencies.
- Nearly one-quarter (24.6%) favor reducing the outright level of reserves to reduce risk exposure.
- A minority consider structural alternatives: creating/shifting to SWFs (12.3%), increasing exchange rate flexibility (7.0%), or reducing reserve levels (24.6%).
- LICs show a higher preference for holding more gold (33.3%) and are relatively more likely than ACs to consider pursuing increased exchange rate flexibility (11.1% LIC vs. 0.0% AC).
- Concern that demand for gold may be driven by backward-looking motives rather than as a hedge against tail inflation risk.

### Additional practices suggested by respondents
- Further diversification of portfolios to increase expected return levels without changing risk tolerance.
- Constructing risk frameworks better able to account for tail risks.
- Concerns highlighted: extremely low interest rates and the potential consequences of a sudden increase, managing credit risk, preserving capital, high concentration within portfolios, and operating in a low-return environment.

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### 26. Do your reserve management practices differ depending on whether reserves are considered ample or excessive?

### Practices applied to ample/excess reserves (survey shares)
- 1 Take more credit risk: 23.0% total, 21.1% AC, 30.4% MIC, 15.8% LIC
- 2 Take more liquidity risk: 34.4% total, 42.1% AC, 34.8% MIC, 26.3% LIC
- 3 Have a different currency composition: 16.4% total, 21.1% AC, 17.4% MIC, 10.5% LIC
- 4 Have a longer duration: 31.1% total, 26.3% AC, 21.7% MIC, 47.4% LIC
- 5 Other (e.g., Ample/excess reserves are not identified; Ample/excess reserves are not managed differently): 52.5% total, 68.4% AC, 52.2% MIC, 36.8% LIC
- Number of respondents: 61 total, 19 AC, 23 MIC, 19 LIC

### Empirical observations and implications
- About half of reserve managers (32 respondents) take more risk with reserves they consider ample.
- Practices when managing ample reserves differently: most commonly taking more liquidity risk (34.4%) and longer duration (31.1%).
- Some reserve managers take additional credit risk but not duration risk—observed primarily among ACs—potentially reflecting annual reporting or balance sheet limitations that constrain interest rate risk.
- ACs appear more prepared to take on liquidity risk; LICs are more likely to extend duration for ample reserves (47.4% LIC report longer duration).
- Several respondents noted that accumulation of reserves has led to inclusion of new asset classes to enhance risk/return profiles.
- A substantive share (52.5% total; 68.4% AC) indicate ample/excess reserves are not identified or are not managed differently.

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*Source: IMF Working Paper survey content (questions 24–26).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2013/_wp1399.pdf_