Strategies for the Management of Reserve Assets

Andreas Hauschild and Christian Buschmann

From the 1950s onwards, it could be seen that on a bank’s asset side of the balance sheet there would be a portfolio of sovereign bonds and bills. This changed in the first decade of the 21st century. With the flawed thinking that market liquidity can be taken for granted this practise of holding assets of sovereign debtors felt into disuse in favour of holding higher yielding bank bonds and corporate bonds. This would have been attractive from the return point of view, as government debt carries lower returns than bank debt (Choudhry 2012, p. 622).

Prior to the 2007–8 financial crisis, the assumption of granted liquidity was somehow correct: financial markets were liquid and funding was easily available at low cost, but the emergence of the crisis showed how rapidly market conditions can change, leading to a situation that several institutions, regardless of their capital levels, experienced severe liquidity issues, forcing either an intervention by the responsible central bank or a shutdown of the institution (Bonner and Eijffinger 2012).

Analogously to the thinking about market liquidity, banks did not consider a proper liquidity management as a crucial part of their daily