Central Bank Governance and Reserve Portfolios Investment Policies : An Empirical Analysis
This paper uses a unique survey data set of 105 central banks to investigate whether investment policies for central bank foreign reserve portfolios are linked to the governance arrangements for reserve management. The paper evaluates whether a cen...
| Main Authors: | , , , |
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| Format: | Working Paper |
| Language: | English |
| Published: |
World Bank, Washington, DC
2021
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/undefined/953891630350698523/Central-Bank-Governance-and-Reserve-Portfolios-Investment-Policies-An-Empirical-Analysis http://hdl.handle.net/10986/36228 |
| Summary: | This paper uses a unique survey data set
of 105 central banks to investigate whether investment
policies for central bank foreign reserve portfolios are
linked to the governance arrangements for reserve
management. The paper evaluates whether a central
bank's investment decision-making structure impacts how
much risk institutions take in their reserve management
operations and the level of diversity in their reserve
portfolios. Additionally, it explores the implications of
the broader governance environment on reserve management.
The analysis yields four key findings. First, internal
governance arrangements matter for foreign reserve portfolio
investment policy; the empirical results indicate that
reserve portfolios are more diversified in central banks in
which the middle office directly reports to the board.
Second, controlling for the level of reserves, the
macroenvironment, and the broader governance environment,
reserve portfolios are more diversified in central banks
where the back, middle, and front offices are separated.
Third, the regression analysis also reveals that central
banks in countries where the Ministry of Finance has an
obligation to cover negative equity have fewer eligible
currencies and are therefore less diversified. Fourth,
central banks where boards actively exercise portfolio
oversight usually have portfolios with more risk and
diversification. Portfolios with longer investment horizons,
more currencies, and a broader set of asset classes have
performed better historically while limiting downside risk.
Given that the analysis controls the broader governance
environment, the data indicate that any central bank can
improve its internal governance regardless of the external
governance environment. This paper contributes to the
literature on central bank foreign reserves management and
on understanding the importance of governance arrangements
in investment policy. |
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