The Challenges of Managing Large FX Reserves: The Case of Israel

12 Pages Posted: 13 Dec 2019

Date Written: October 31, 2019

Abstract

This paper describes the Bank of Israel’s investment philosophy and policy. The paper focuses on the strategic asset allocation framework and the role of the Monetary Policy Committee in setting the investment strategy. The abundant FX reserves in recent years, and falling yields on traditional reserve assets, called for reform in reserves management. Institutional changes – the enactment of a new central bank law – made reform possible. The result was a dramatic shift in the BOI’s investment policy. In seven years, the BOI moved from a classic reserves portfolio to a multi-asset diversified portfolio that includes a sizeable allocation of equities and corporate bonds. These riskier assets significantly increased the returns on reserves in recent years. For example, between 2012 and 2017, investment in equities was the source of 64% of the total return, which was 9.2%. The contribution of equities to total return allowed the BOI to preserve the purchasing power of reserves at times when traditional reserve assets yielded negative real returns.

Full Publication: Reserve Management and FX Intervention

Keywords: asset allocation, diversification, risk return, value at risk, international reserves

JEL Classification: G11, F21

Suggested Citation

Benita, Golan and Baudot-Trajtenberg, Nadine and Friedman, Amit, The Challenges of Managing Large FX Reserves: The Case of Israel (October 31, 2019). BIS Paper No. 104m, Available at SSRN: https://ssrn.com/abstract=3501106

Golan Benita (Contact Author)

Bank of Israel

P.O. Box 780
Jerusalem, 91907
Israel

Nadine Baudot-Trajtenberg

Bank of Israel

P.O. Box 780
Jerusalem, 91907
Israel

Amit Friedman

Bank of Israel

P.O. Box 780
Jerusalem, 91907
Israel

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