{
  "title": "Procyclicality in Central Bank Reserve Management: Evidence from the Crisis",
  "publication": "IMF Working Papers, June 1, 2010",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2016/12/31/procyclicality-in-central-bank-reserve-management-evidence-from-the-crisis-23991",
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  "summary": "A decade-long diversification of official reserves into riskier investments came to an abrupt end at the beginning of the global financial crisis, when many central bank reserve managers started to withdraw their deposits from the banking sector in an apparent flight to quality and safety.",
  "sections": [
    {
      "heading": "Key findings",
      "content": "- A decade-long diversification of official reserves into riskier investments came to an abrupt end at the beginning of the global financial crisis.\n- Many central bank reserve managers started to withdraw their deposits from the banking sector in an apparent flight to quality and safety.\n- The paper estimates that reserve managers pulled around US$500 billion of deposits and other investments from the banking sector.\n- Although not the main cause, this procyclical investment behavior is likely to have contributed to the funding problems of the banking sector.\n- The funding problems of the banking sector required offsetting measures by other central banks such as the Federal Reserve and Eurosystem central banks.\n- The behavior highlights a potential conflict between the reserve management and financial stability mandates of central banks."
    },
    {
      "heading": "Quantitative estimate",
      "content": "- Estimated withdrawals from the banking sector: US$500 billion"
    },
    {
      "heading": "Analysis and lessons",
      "content": "- The paper analyzes reserve managers’ actions during the crisis and draws lessons for strategic asset allocation of reserves going forward.\n- The analysis emphasizes the tension between pursuing higher yields through diversification and the implications for financial stability during periods of stress.\n- Reserve managers’ flight-to-quality and safety behaviors can have systemic spillovers to banks’ funding conditions, necessitating coordinated central bank responses."
    },
    {
      "heading": "Policy implications and recommendations",
      "content": "- Central banks should consider the potential conflict between reserve management objectives (including yield-seeking diversification) and financial stability mandates when designing strategic asset allocation.\n- Strategic asset allocation of reserves going forward should account for the risk of procyclical behavior under stress and its possible systemic impacts on the banking sector.\n- Coordination among central banks may be necessary to offset unintended funding pressures on the banking sector that arise from reserve management actions.\n\nProcyclicality in Central Bank Reserve Management: Evidence from the Crisis — IMF Working Paper by Jukka Pihlman and Han van der Hoorn, June 1, 2010.\n\n---\n\n Content in this bundle\n\n- wp10150\n  - wp10150 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - wp10150 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/31/procyclicality-in-central-bank-reserve-management-evidence-from-the-crisis-23991"
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    "Authors: Jukka Pihlman, Han van der Hoorn",
    "Published: June 1, 2010",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781455201334.001",
    "A decade-long diversification of official reserves into riskier investments came to an abrupt end at the beginning of the global financial crisis.",
    "Many central bank reserve managers started to withdraw their deposits from the banking sector in an apparent flight to quality and safety.",
    "The paper estimates that reserve managers pulled around US$500 billion of deposits and other investments from the banking sector.",
    "Although not the main cause, this procyclical investment behavior is likely to have contributed to the funding problems of the banking sector.",
    "The funding problems of the banking sector required offsetting measures by other central banks such as the Federal Reserve and Eurosystem central banks.",
    "The behavior highlights a potential conflict between the reserve management and financial stability mandates of central banks.",
    "Estimated withdrawals from the banking sector: US$500 billion",
    "The paper analyzes reserve managers’ actions during the crisis and draws lessons for strategic asset allocation of reserves going forward.",
    "The analysis emphasizes the tension between pursuing higher yields through diversification and the implications for financial stability during periods of stress.",
    "Reserve managers’ flight-to-quality and safety behaviors can have systemic spillovers to banks’ funding conditions, necessitating coordinated central bank responses.",
    "Central banks should consider the potential conflict between reserve management objectives (including yield-seeking diversification) and financial stability mandates when designing strategic asset allocation.",
    "Strategic asset allocation of reserves going forward should account for the risk of procyclical behavior under stress and its possible systemic impacts on the banking sector.",
    "Coordination among central banks may be necessary to offset unintended funding pressures on the banking sector that arise from reserve management actions.",
    "**_wp10150**"
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