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Current news 15 Apr 2016

Central Banks, a key element of the global economy

The global economic landscape would be impossible to understand without the essential role that central banks are playing. Any statement issued on any given day by any of the chairs of the world’s main regulators (Kuroda, Yellen, Draghi or Carney, to mention some of the most prominent) is certain to make markets explode into frenzied motion. The “whatever it takes” uttered by Draghi in 2012 will resound forever in the collective mind of the financial world.

Central banks are responsible for ensuring price stability and confidence in national currencies. Their measures have a direct impact on credit and savings regulations.

Another task, maybe less well-known, for which central banks are responsible, is the effective management of international reserves to tackle financial and foreign exchange turbulence. Currently, due to the total volume of reserves they manage – approximately $13 trillion – central banks have become key players in the world economic landscape.

Design of the Monetary Policy

The start of the financial crisis in 2008 triggered a shift in the priorities of monetary policies, which begun to focus on strengthening the banking system. Traditional measures and instruments of central banks had to be underpinned through the implementation of the so-called Quantitative Easing operations.

These expansive monetary policies entail massive purchases by Central Banks in the secondary market of debt issued – mainly – by states and of private debt securities. The ultimate purpose of this policy is to invigorate the transmission mechanisms of monetary policies, in order to stimulate the economy.

Management of International Reserves

The basic premises of central banks when managing international reserves have been, by order of significance: (I) security, capital preservation; (II) high degree of liquidity; and, finally, as desirable factor, (III) an adequate profitability. These premises turn central banks into very conservative public investors, always putting immediate availability (very liquid short-term investments) and capital preservation before profitability.

However, and – paradoxically – as a result to their own monetary policies, the current economic scenario in most developed markets is riddled with low returns and negative rates. This has caused many central banks to step out of their comfort zones to pursue higher profits, and start engaging in slightly riskier investments, increasing the diversification of currencies (including the RMB, for example) and expanding the range of instruments toward somewhat higher (risk-adjusted) profitability rates, or extending the average term of their portfolios.

ECB headquarters

European Central Bank building - EFE

Central banks and their customer relationship with financial institutions

Central banks also need support from financial institutions to perform their functions. BBVA, for instance, has a team exclusively devoted to offering coverage to public sector customers, including central banks. The Global Public Finance unit is responsible for covering public sector customers and offering them different collaboration and support alternatives: Market color/research, transactional and product capabilities and specific training sessions.

From this unit, BBVA puts a series of support mechanisms at the disposal of central banks, in order to help them to better manage their international reserves. These mechanisms include the purchase-sale of sovereign bonds and other investment instruments, long-term deposits, mandates for outsourcing the management of a portion of their reserves and hedging instruments.

Within the context of this line of support, the institution organizes the Seminar for Public Sector Issuers and Investors, aimed especially at central banks, sovereign funds and public issuers such as national treasury departments, public agencies and multilateral institutions. This seminar provides a meeting framework for public sector customers, which allows to perform an in-depth analysis of the different financial markets, and an opportunity to go take a look at currently relevant topics, such as the world macroeconomic outlook, asset allocation strategies or investment flows. The purpose of this forum is to gain a better understanding of the needs of this very specific customers, helping them to bring their investment strategy to fruition.

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