Procyclicality in Central Bank Reserve Management: Evidence from the Crisis

June 1, 2010

Preview Citation

Format: Chicago

Jukka Pihlman, and Han van der Hoorn. Procyclicality in Central Bank Reserve Management: Evidence from the Crisis, (USA: International Monetary Fund, 2010) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

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. 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.

Subject: Bank deposits, Banking, Commercial banks, International reserves, Reserves management

Keywords: Central bank, Deposit, Reserve, Securities, WP, Yield

Publication Details

Pages:

27
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2010/150
Stock No:

WPIEA2010150
ISBN:

9781455201334
ISSN:

1018-5941

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