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Central Bank of Israel invests forex reserves in equity to boost returns

Summary:
Bank of Israel Deputy Governor Andrew Abir discusses the forex reserve investment strategy of the central bank: It is important that the investment strategy for the foreign exchange reserves, subject to attaining the security and liquidity targets, generate an average return over time that is at least equal to the cost of financing the reserves (the cost of liabilities on the Bank’s balance sheet). The Bank of Israel is constantly examining ways to adjust the investment policy and the weight of risk assets in the portfolio to the changing environment.  The guidelines for the investment policy that are set out by the Monetary Committee are updated accordingly from time to time. The Bank of Israel is currently examining whether to increase the weight of equities in the foreign exchange

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Bank of Israel Deputy Governor Andrew Abir discusses the forex reserve investment strategy of the central bank:

  1. It is important that the investment strategy for the foreign exchange reserves, subject to attaining the security and liquidity targets, generate an average return over time that is at least equal to the cost of financing the reserves (the cost of liabilities on the Bank’s balance sheet).
  2. The Bank of Israel is constantly examining ways to adjust the investment policy and the weight of risk assets in the portfolio to the changing environment.  The guidelines for the investment policy that are set out by the Monetary Committee are updated accordingly from time to time.
  3. The Bank of Israel is currently examining whether to increase the weight of equities in the foreign exchange reserves, and whether to invest in additional assets, such as a low rate of investment in corporate bonds that are below investment grade.  (Currently, investment in corporate bonds is only at investment grade, and is restricted to 7 percent of the reserves.)

    Abir described the revolution in managing the Bank of Israel’s foreign exchange reserves during the past decade.  From a portfolio that was almost entirely invested in government bonds, with a desire to maintain very high liquidity, the Bank of Israel began putting greater emphasis on the portfolio’s yield.  Today, the foreign exchange reserves include more volatile assets such as equities and investment-grade corporate bonds.   In 2012, the Bank of Israel began investing some of the reserves in equities abroad.  The start of such investments, amounting to 3 percent of the reserves, was made possible due to the increase in the reserves, and in view of the new Bank of Israel Law, which enabled investment in a broad variety of financial assets, including equities, that were not permitted under the old law.  As the trend of increasing reserves continued, the Bank of Israel also gradually increased its investments in equities.  Today, equities account for 15 percent of the foreign exchange reserves.

Interesting to note this..

Amol Agrawal
I am currently pursuing my PhD in economics. I have work-ex of nearly 10 years with most of those years spent figuring economic research in Mumbai’s financial sector.

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