Global reserves management
Krzysztof Rybinski, Urszula Sowa
Foreign exchange reserves held by central banks rose to more than 5 trillion dollars in 2006 from 1.5 trillion a decade ago and are expected to rise further in the coming years. Sovereign wealth funds manage assets in excess of 1.5 trillion dollars, and total reserves managed jointly by central banks and SWFs are forecasted to top 10 trillion dollars by 2010. This paper presents motives behind rapid reserves growth and proposes a concept of OCHAR – Opportunity Cost of Holding Ample Reserves – which is defined as a forgone GDP growth amid too conservative reserve management by central banks. We estimate OCHAR for a sample of 33 countries which accounted for three-quarters of total central bank reserves in 2005. We also argue, that unlike in XX century, where central banks used to be very secretive institutions, XXI century central banking is characterized by widespread knowledge sharing and transparency. Therefore best practices, such as inflation targeting or efficient reserve management spread out quickly and are adopted by increasing number of central banks. Thus central banks collectively embarked on a reserves diversification journey, it does appear to be the central banks collective mindset and we can speak of the global reserves management in XXI century. At the end of the paper we put forward several hypotheses of what could be the consequences of this diversification journey. It seems that relative prices of various assets will find new steady states, which may have little in common with relative valuations seen in XX century. We also expect that slowly, over time, US “exorbitant privilege” will be eliminated. Finally we consider global stability risks in the context of the new reserves management style adopted by central banks. We postulate that due to the increasingly global nature of shocks as long as central banks and governments in countries-stakeholders of global imbalances focus their actions on maintaining global price and financial stability, central banks in smaller emerging markets can afford to improve reserve management without incurring additional stability risk.