Has the pandemic fundamentally changed reserve management? Insights from 119 central banks

The World Bank Treasury's Reserve Advisory and Management Partnership (RAMP) launched the Third RAMP Survey on reserve management practices in 2021, with a record of 119 participating central banks. The survey builds upon another two biennial RAMP surveys (the survey in 2018 followed by the second survey in 2019), allowing central banks to benchmark their practices against peer institutions and their evolution over time.

The Third RAMP Survey was conducted at the height of the COVID-19 pandemic when reserve managers faced unprecedented challenges. With economic activity ground to a halt worldwide, central banks implemented unparalleled monetary policies, ultimately lowering their policy rates to historically depressed levels, even below zero. Simultaneously, some countries struggled to meet their liquidity needs in foreign currency. Besides, lockdowns globally forced these institutions to adjust to a remote working environment. We observed several trends since previous RAMP surveys as institutions responded to the challenging environment and long-term changes wrought by the pandemic.

First, central banks put more weight on safety and liquidity than on return to respond to the potentially higher reserve need . Furthermore, a modest increase (7%) of respondents indicated that saving for intergenerational equity is not relevant. Although self-insurance against external shocks remains the primary objective for holding reserves, conducting foreign exchange policies and servicing international debt obligations have become more relevant (see Figure 1).

Figure 1. Changes in investment objectives from the previous RAMP Survey

Second, central banks reduced their duration by an average of seven months likely to seek protection from the potential increase in interest rates once the economic impact of the pandemic subsides . They also have increased their risk tolerance levels during 2020, probably in response to the low-yield environment and the elevated market volatility. Whether these trends manifest into a durable trend remain to be seen.

Third, reserve managers have considerably expanded their eligible currencies, with the largest increase (15%) in the Chinese renminbi (CNY)  (see Figure 2). In both prior RAMP surveys, about half of central banks allowed CNY investments, but now two-thirds of central banks have expanded their eligibility to CNY. The then-interest rate differential between China and other countries may explain this phenomenon. The Chinese renminbi offers the highest nominal yield among the leading reserve currencies and is the second largest economy in the world, which may continue to drive this trend for years to come. Lastly, other currencies, such as the Australian dollar, Canadian dollar, Singapore dollar and Korean won, expanded their eligibility.

Figure 2. Changes in currency eligibility from the previous RAMP Survey

Fourth, reserve managers diversified asset classes in a search for yield, with notable eligibility expansions for inflation-linked bonds and mortgage-backed securities (MBS) . Inflation-linked bonds saw the most significant increase in eligibility, now 61 percent of institutions allow investments in these securities versus 46 percent two years ago. In comparison, central banks expanded eligibility for MBS by 13 percent to enhance returns while maintaining high credit quality. Broader changes in diversification may be in part from the challenge of investing in short-term products in the current yield environment and the need to improve expected returns.

Figure 3. Changes in asset class eligibility from the previous RAMP Survey

Finally, central banks struggled to perform critical functions outside of the office, given technological drawbacks and cybersecurity concerns. The pandemic placed an enormous operational burden on most institutions . From an operational perspective, roughly half of the central banks were unprepared for a pandemic in 2019. Although most institutions changed their work arrangements, fewer than half moved to a full working-from-home mode. The pandemic’s fundamental impacts on central bank business continuity have yet to fully materialize for some institutions, especially those whose ability to adopt new technological infrastructure is a long-term institutional project.

Central banks confronted, and persevered through, the crisis. They responded with innovation demanded by necessity in business continuity. They adjusted their investment guidelines and principles and expanded their eligible currencies and asset classes. While some changes may be temporary, reserve management will likely witness lasting lessons from the pandemic for years to come.