WORKING PAPER SERIES
NO 1377 / SEPTEMBER 2011
RANKING, RISK-TAKING AND EFFORT
AN ANALYSIS OF THE ECB’S FOREIGN
by Antonio Scalia 1
and Benjamin Sahel 2
"...ECB foreign reserves initially comprised transfers of foreign reserve assets to the ECB from the NCBs of the euro-area countries, in proportion to each NCB’s capital share in the ECB (Scheller, 2006, ch. 3). When new countries join the euro area, their NCBs also transfer foreign reserve assets to the ECB, in the same proportion as the other NCBs. Over time, the ECB’s foreign reserves may increase or decrease as a reflection of portfolio returns and of purchases or sales of foreign currency by the ECB. In addition, the ECB may call upon the euro-area NCBs to transfer additional foreign reserve assets if needed. Within the Eurosystem, which comprises the ECB and the euro-area NCBs, total foreign reserves amounted to around €591 billion equivalent at the end of 2010, of which around €57 billion were held by the ECB and around €534 billion were held by the NCBs. The purposes of the NCBs’ foreign reserves include: international obligations (e.g. holdings of IMF special drawing rights); optimization of balance sheet structure; and preparedness to transfer additional foreign reserve assets to the ECB if needed. It should also be noted that a significant portion of the Eurosystem’s foreign reserves is made up of gold holdings, which accounted for €366 billion equivalent (or 62 per cent) at the end of 2010. When comparing Eurosystem and ECB foreign reserve holdings with those of other central banks, it is important to bear in mind that the responsibilities of these other central banks as regards foreign exchange policies may differ from those of the ECB..."
"...The ECB foreign reserves’ portfolio management objectives derive from the purpose of the ECB’s foreign reserves. Accordingly, the high-level objectives are defined as being “liquidity, safety, return”, with the three aspects being ranked in this order of priority. Hence, portfolio liquidity and risk exposures are strictly controlled. Within the range of acceptable liquidity and risk profiles, the objective of the portfolio management process is to maximize portfolio returns..."