Central Banks

STUDY ON FOREIGN EXCHANGE RESERVE MANAGEMENT BY CENTRAL BANKS-ECB, FEDERAL BANK, MAS, BANK OF ENGLAND, RBI

Foreign exchange reserves are a crucial asset for every nation and important tool for monetary and exchange rate policy. Effective management of reserves requires strong control systems and clear objectives. This leads to significant contribution for successful macro-economic management. A strong and appropriate policy framework is necessary which will help a country to face any shock arising from global financial market or their domestic financial system.

Reserve management strategies differ from country to country based on factors like country’s specific policy environment and monetary and exchange arrangements. It also depends on the country’s need of holding reserves that they have. Using valuation methods, in monetary authority’s financial statements, the reserve holdings should be properly represented.

In this research, the foreign currency reserve management strategies followed by different Central banks are studied. The analysis would be done on the different countries’ Central banks namely European Central Bank, Monetary Authority of Singapore, European Central Bank and Federal Reserve.

Analysis would be based on factors like

1) how different banks ensure adequate foreign reserves for meeting a range of objectives

2) how liquidity ,credit and operational risks are controlled

3) how different economic policies and circumstances influence the reserve management objectives

Exchange rate system and the objective behind holding the reserves also influence the reserve availability. It is also known that in setting reserve management objectives and priorities, liquidity and security are given preference before profit as reserves should be available during risky situations when they are needed.