DANMARKS NATIONALBANK SO SOVEREIGN VEREIGN AS ASSE SET T AN - - PowerPoint PPT Presentation

DANMARKS NATIONALBANK

SO SOVEREIGN VEREIGN AS ASSE SET T AN AND LIAB ABILITY ILITY MAN ANAGEMENT AGEMENT IN A DE A DECE CENTRA NTRALI LIZE ZED D ENVIRO VIRONMENT NMENT

Ib Hansen, Special adviser.

As Asse sets ts and d liabiliti abilities es fo for governmen rnment A s A sho hort t intr trod

• ductio

uction n

Ba Balan ance ce sh sheet t obj bjec ective tives The he Dani nish sh ca case se

All share the common objectives of a macroeconomic stability oriented framework:

• Fixed exchange rate to the euro
• Sustainable medium term fiscal orientation
• Govern

ernme ment nt foreign eign debt finances nces currency ncy reserve ve – not defici icit

3

Objecti ectives es of t f the he Cent ntral al Bank k and d th the DMO

• Central Bank and DMO have both common and exclusive objectives  scope for some coordination
• Central bank:
• Fixed exchange-rate policy against the euro (foreign exchange reserve)
• Financial stability (low level of risk appetite)
• Debt management:
• Finance government deficit
• Finance currency reserve
• Low long term costs taking risks into account
• Facilitate access to the financial markets in the longer term
• Support well-functioning domestic financial market, monetary policy and financial stability

4

Foreign eign exch chan ange ge expo posure sure befo fore re and d aft fter co coordi dinati nation

• n
• 15
• 10
• 5

5 10 15

81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 Central government Central bank Net

DKK billion

Coordination Loss

5

Euro

03-12-2014 DANMARK RKS NATIONALBANK 6

03-12-2014 DANMARKS NATIONALBANK 6

725 730 735 740 745 750 755 760 765 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 DKK per 100 EUR Fluctuation band +/-2,25 per cent Central rate (1 euro=7,46038 kroner) Market value

St Stable le DKK

Lehman Net buying of euro as intervention

• 80
• 60
• 40
• 20

20 40 60

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

billion kr.

Two Two ty type pes s of f cu curenc ncy movemen ments ts

• Own cur

urrency ency vs.

• s. the

e rest t

• Unavoidable risk asscocated with FX

borrowing/investing

• Reflect exposure against risk minimizing

basket.

• In Denmark:
• Risk vs Euro
• Not so simple in other cases
• Other

er cur urrencies encies vs.

• s. eacho

hother her

• Avoidable
• Reflect risk reward tradeoff.

7

Co Coordina dinati tion

• n of e

f exch chan ange ge-rate ate risk sk on Governm ernmen ent t de debt t and d FOREX REX-reserve reserves

• Benefits from coordinating exchange-rate risk
• Government borrows in foreign currency to supplement the central bank foreign-exchange reserve (peg of

DKK to the Euro)

• When separating the management of assets from liabilities – potentially large net exposures
• Objective:
• Avoid borrowing in one currency and investing in another
• Manage gross currency exposure
• Currency swaps and forwards to manage currency exposure
• No forecast of future exchange rates

8

Bo Borrowin wing to to fi fill th the cu currency ency rese serve: rve: Av Avoid large ge net t expo posure sure

9

Currency ncy Central bank Govern ernme ment nt Net DKK

• 10

+10 EUR +10 +10 USD

• 10
• 10

JPY GBP

Av Avoid large ge gross ss expo posure sure in hi high risk sk cu curren encies cies

10

Currency ncy Central bank Govern ernme ment nt Net DKK

• 10

+10 EUR USD +10

• 10

JPY GBP

Sm Small ll net t and d gross ss expo posure sure

11

Currency ncy Central bank Govern ernme ment nt Net DKK

• 10

+10 EUR +10

• 10

USD JPY GBP

AL ALM pr proce cess ss

• 1991 debt management function shifted from Treasury to Central bank
• Central bank is an agent of the treasury
• One objective was to facilitate management of assets and liability on a consolidated basis.
• Report from national audit authority.
• Quarterly strategy meeting
• Treasury, Central bank and Ministry of economic
• Treasury forecast net lending
• Central bank analyses strategies and makes proposals
• Treasury sign off on guidelines

Mean an variance ance po porte tefol folio io mode del l

Foreign eign exch chan ange ge expo posure sure befo fore re and d aft fter co coordi dinati nation

• n
• 15
• 10
• 5

5 10 15

81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 Central government Central bank Net

DKK billion

Coordination Loss

14

Euro

• Government looks at the risk of higher debt servicing cost
• Not a tradable portfolio
• Accounts based on interest payments
• Long maturity gives lover risk
• Central bank looks at the risk of lower value.
• Assets con be sold
• the effective size of portfolios is relevant
• Short duration gives lower exposure to interest rate hikes.
• Coor
• rdi

dination nation of interest rate risk is very challenging

Inte terest est rate te risk sk is di s diff ffer erent ent in governme rnment nt de debt t and d ce centr tral al bank nk

Co Concl cluding uding remar arks ks

• Full integration of national balance sheet not possible and not wanted
• SALM is important to DMO’s risk management
• Institutional set-up consistent and transparent

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