A survey of the fundamental issues and techniques surrounding risk management.

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"The main aim of the current as well as previous Public Investor Conferences has been to create a forum where academics and private and public sector investment professionals can meet to discuss and ponder the issues of specific relevance to public sector investors. Investment rationales, preferences, eligible investments, governance structures and accountabilities as well as aspects relating to the availability of human and technical resources distinguish public investors. These idiosyncrasies have profound effects on how portfolio and risk management activities are organized and performed in public sector institutions. Faced with high growth rates in foreign reserves and other pools of publicly managed funds, public investors are beginning again to discuss broader diversification of assets. Judging from the contributions to and discussions at the conference, central banks are concentrating their search for diversification opportunities on investment alternatives among sovereign obligations, including inflation-linked instruments and investments denominated in currencies other than those represented in the SDR basket. At the same time, public investors are becoming more aware of possible tension between what is optimal at the level of an individual investor and what might be required from the perspective of stability of financial markets. In terms of methodologies and techniques, similar to other institutional investors, public investors have accelerated efforts to develop and implement approaches for the management of market and credit risk that take on board lessons from the financial crisis."- -Introduction.

Effective risk management at central banks is best enabled by a sound framework embedded throughout the organization that supports the design and execution of risk management activities. To evaluate the risk management practices at a central bank, the Safeguards Assessments Division of the IMF’s Finance Department developed a tool that facilitates stocktaking of elements that are present and categorizes the function based on its maturity. Tailored recommendations are then provided to the central bank which provide a roadmap to advance the risk management function.

This book addresses the welfare gains and costs of accumulating foreign exchange reserves and the implications for the functioning of the global financial system. The tremendous growth of central bank reserves has led to an increased focus on raising returns in addition to the traditional preference central banks have for maintaining liquid portfolios. Issues such as asset and currency diversification, the impact of new accounting rules and the profit distribution agreements with the government are analysed, adding new insights to the current debate on the optimal size of central bank reserves. This book brings together a wide range of experts from central banks, investment banks and the academic community.