Central Bank Reserve Management


Book Description

This book addresses the welfare gains and costs of accumulating foreign exchange reserves and the implications for the functioning of the global financial system. The tremendous growth of central bank reserves has led to an increased focus on raising returns in addition to the traditional preference central banks have for maintaining liquid portfolios. Issues such as asset and currency diversification, the impact of new accounting rules and the profit distribution agreements with the government are analysed, adding new insights to the current debate on the optimal size of central bank reserves. This book brings together a wide range of experts from central banks, investment banks and the academic community.




Central Bank Governance and the Role of Nonfinancial Risk Management


Book Description

This paper argues that nonfinancial risk management is an essential element of good governance of central banks. It provides a funnelled analysis, on the basis of selected literature, by (i) presenting an outline of central bank governance in general; (ii) zooming in on internal governance and organization issues of central banks; (iii) highlighting the main issues with nonfinancial risk management; and (iv) ending with recommendations for future work. It shows how attention for nonfinancial risk management has been growing, and how this has amplified the call for better governance of central banks. It stresses that in the area of nonfinancial risk management there are no crucial differences between commercial and central banks: both have people, processes, procedures, and structures. It highlights policy areas to be explored.




Powering the Digital Economy: Opportunities and Risks of Artificial Intelligence in Finance


Book Description

This paper discusses the impact of the rapid adoption of artificial intelligence (AI) and machine learning (ML) in the financial sector. It highlights the benefits these technologies bring in terms of financial deepening and efficiency, while raising concerns about its potential in widening the digital divide between advanced and developing economies. The paper advances the discussion on the impact of this technology by distilling and categorizing the unique risks that it could pose to the integrity and stability of the financial system, policy challenges, and potential regulatory approaches. The evolving nature of this technology and its application in finance means that the full extent of its strengths and weaknesses is yet to be fully understood. Given the risk of unexpected pitfalls, countries will need to strengthen prudential oversight.




The Federal Reserve System Purposes and Functions


Book Description

Provides an in-depth overview of the Federal Reserve System, including information about monetary policy and the economy, the Federal Reserve in the international sphere, supervision and regulation, consumer and community affairs and services offered by Reserve Banks. Contains several appendixes, including a brief explanation of Federal Reserve regulations, a glossary of terms, and a list of additional publications.




Foreign Exchange Intervention Rules for Central Banks: A Risk-based Framework


Book Description

This paper presents a rule for foreign exchange interventions (FXI), designed to preserve financial stability in floating exchange rate arrangements. The FXI rule addresses a market failure: the absence of hedging solution for tail exchange rate risk in the market (i.e. high volatility). Market impairment or overshoot of exchange rate between two equilibria could generate high volatility and threaten financial stability due to unhedged exposure to exchange rate risk in the economy. The rule uses the concept of Value at Risk (VaR) to define FXI triggers. While it provides to the market a hedge against tail risk, the rule allows the exchange rate to smoothly adjust to new equilibria. In addition, the rule is budget neutral over the medium term, encourages a prudent risk management in the market, and is more resilient to speculative attacks than other rules, such as fixed-volatility rules. The empirical methodology is backtested on Banco Mexico’s FXIs data between 2008 and 2016.




Financial Risk Management


Book Description

"Drawing on practical methods used by successful risk managers in emerging and developed markets throughout the world, the book provides specific guidance on establishing a modern risk management framework and developing efficient approaches to increase the profitability of risk management activities in emerging market settings."--BOOK JACKET.




The Risks of Financial Institutions


Book Description

Until about twenty years ago, the consensus view on the cause of financial-system distress was fairly simple: a run on one bank could easily turn to a panic involving runs on all banks, destroying some and disrupting the financial system. Since then, however, a series of events—such as emerging-market debt crises, bond-market meltdowns, and the Long-Term Capital Management episode—has forced a rethinking of the risks facing financial institutions and the tools available to measure and manage these risks. The Risks of Financial Institutions examines the various risks affecting financial institutions and explores a variety of methods to help institutions and regulators more accurately measure and forecast risk. The contributors--from academic institutions, regulatory organizations, and banking--bring a wide range of perspectives and experience to the issue. The result is a volume that points a way forward to greater financial stability and better risk management of financial institutions.




Procyclicality in Central Bank Reserve Management


Book Description

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. We estimate that reserve managers pulled around US$500 billion of deposits and other investments from the banking sector. Although clearly not the main cause, this procyclical investment behavior is likely to have contributed to the funding problems of the banking sector, which 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. This paper analyzes reserve managers’ actions during the crisis and draws some lessons for strategic asset allocation of reserves going forward.