The International Monetary Fund (IMF) convened its fourth annual Roundtable of Sovereign Asset and Reserve Managers in Washington, D.C., on June 5–6, 2012. This year’s Roundtable focused on issues surrounding the impact of a prolonged financial and sovereign debt crisis on the function of reserve management. The Roundtable—which has been designed to facilitate the exchange of ideas and experiences in asset and reserve management—was attended by high-level delegates from central banks and ministries of finance from around 30 countries and representatives from select international institutions. Private sector representatives participated in some sessions.

The theme of the fourth Roundtable, organized by the IMF’s Monetary and Capital Markets Department, was Asset Allocation Challenges in Turbulent Times. The discussions covered a set of core issues for reserve managers, including: the safety of assets; evolving currency composition in a changing world; and the challenges of allocating a growing stock of foreign currency reserves in the face of a shrinking supply of safe assets. Further, the ongoing review of the IMF Guidelines for Foreign Exchange Reserves (Guidelines) was presented and discussed at the Roundtable (see the agenda).

Mr. José Viñals, Financial Counsellor and Director of the IMF’s Monetary and Capital Markets Department, in his opening session emphasized “the potential for a vicious cycle between high sovereign debt, slow growth, and bank balance sheet stress.” In this uncertain environment, he stressed the challenges that reserve managers face with respect to the shrinking pool of safe assets, the increasing significance of currency diversification, the completion and implementation of regulatory reforms, and the increasing coordination among reserve managers. Mr. Jörg Decressin, Deputy Director of the IMF’s Research Department, emphasized the fragility of the global economy, and stressed the need to avoid chocking-off economic growth, while strengthening bank balance sheets and putting fiscal positions on a sound footing over the medium term.

Delegates discussed the gap between a growing demand for safe assets—given reserve growth, regulatory reforms, and lower risk tolerance—which is outpacing the supply of safe assets, stemming from rising market concerns about the sustainability of public debt in many high-rated countries. They underscored that absolute safety is hard to attain, with risks being “relative” and depending on the investor’s perspective. Participants acknowledged very gradual shifts to emerging market currencies—though at a much slower pace than shifts in trade patterns—while noting risks related to currency convertibility, and financial market depth and liquidity. Also, delegates discussed the role of nontraditional asset classes, such as equities, amidst a low-yield environment.

In the context of the Roundtable, the results were presented of an IMF staff survey on strategic asset allocation, crisis response, and risk management. These results indicate that there have been widespread changes in reserve management. Perhaps one of the most striking observations was the growing awareness of reserve managers to the impact of their investment management allocations on the markets in which they operate.

Finally, Mr. Franco Passacantando, Managing Director at the Bank of Italy and Chair of the Working Group that reviews the Guidelines, presented the key gaps that have been identified and addressed by the Working Group over the past four months, mainly on the areas of internal governance, risk management, and reserve management strategy. The update of the Guidelines is expected to be completed by the 2012 Annual Meetings of the IMF in Tokyo.