2.6 Foreign Exchange Reserve and Risk Management

The CBRT holds foreign currency reserves in support of a range of objectives that include assisting the government in meeting its FX denominated domestic and foreign debt obligations, maintaining adequate FX liquidity against external shocks, supporting monetary and exchange rate policies, and enhancing market confidence. The CBRT’s reserve management implementations are governed by the CBRT Law No. 1211. Regulations and decisions regarding FX and gold reserve management issued by the CBRT Board pursuant to the same law also provide the framework for the reserve management activities.

The CBRT’s institutional decision-making framework for reserve management has a three-tier hierarchical structure. As the Bank’s top decision making authority, the Board approves the “Guidelines for Foreign Exchange Reserve Management” (the Guidelines) prepared in line with the three priorities cited in the CBRT Law No.1211 as safety, liquidity and return. With the Guidelines, the Board sets the general investment criteria for reserve management and authorizes the Executive Committee and Governor to make decisions about implementation. Decisions made by the Executive Committee or the Governor in accordance with the Guidelines approved by the Board constitute the second tier of the institutional decision making process. At this point, a benchmark portfolio that reflects the CBRT’s general risk tolerance and investment strategy is determined and approved. The benchmark portfolio, which sets out the strategic asset allocation preferences of the CBRT, is submitted to the Executive Committee at the end of each year and becomes effective upon its approval to be implemented in the following year. The third and final tier of the institutional decision making process is the implementation of reserve management practices within the preferences and constraints specified by the Guidelines and the benchmark portfolio. Reserve management activities are carried out within an organizational structure based on the segregation of duties principle. Accordingly, the reserve management activities are carried out by the Reserve Management Division, while related risk management activities are carried out by the Corporate Risk Management Division.

Subject to the objectives and limits set by the Guidelines and the benchmark portfolio, reserve management operations are conducted through FX buying-selling transactions in international markets, FX deposit transactions, securities buying-selling transactions, repo and reverse repo transactions, securities lending transactions and other derivative instruments.

Efforts to control risks that the CBRT may be exposed to during the conduct of its reserve management operations begin with the strategic asset allocation process, as early as when defining the benchmark portfolio. Once the currencies, instruments and maturities to be employed in reserve management have been set, the expected return and the financial risks involved are to a large extent identified. Reflecting the CBRT’s preferences for strategic asset allocation, the benchmark portfolio consists of target currency composition, target maturities and limits of deviation from these targets, maximum permissible transaction limits, eligible transaction types, the investment universe representing countries and instruments to invest in. When determining the benchmark portfolio, the objective is to generate returns while observing constraints such as protecting capital and ensuring the availability of liquidity, the ultimate aim being the prudent management of the reserves, the country’s national wealth. Upon determination of the overall permissible risk level within the framework of the CBRT’s risk tolerance by means of the benchmark portfolio, risks are measured, monitored, and reported regularly.

Factors depressing global growth, chiefly the arrangements that limit international trade on a global basis, caused major central banks to opt for looser monetary policies in 2019.These policies along with the developments deteriorating the risk appetite such as the uncertainties over the Brexit and trade disputes between the US and China shaped the CBRT’s reserve management strategies in 2019. Accordingly, in 2019, further marked with high financial risks, the conservative approach for reserve management was sustained and all measures were taken to preserve reserves.

The CBRT’s gold holdings were 556 tons by 31 December 2019, accounting for 25.7% of total reserves (Chart 2.6.1). CBRT gold reserves conform to international standards and are managed as per the “Guidelines on Gold Reserve Management” issued by the CBRT Board in accordance with the provisions and conditions stipulated in the Central Bank Law No.1211. Pursuant to these Guidelines, the Bank may engage in outright trading of gold and conduct gold deposit, gold swap, location swap and physical gold transfer transactions. From October 2011 onwards, banks were able to keep a specified portion of their reserve requirements as standard gold according to the ratios determined for types of liabilities.

Gold holdings 556 tons By 31 December 2019, gold holdings reached 556 tons, accounting for 25.7% of total reserves.

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