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 oductio 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 on DKK billion 15 Coordination 10 5 0 -5 Euro -10 Loss -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 Central bank Net government 5
6 St Stable le DKK DKK per 100 EUR Lehman 725 Fluctuation band +/-2,25 per cent 730 735 Market value Central rate (1 euro=7,46038 kroner) 740 745 750 755 760 765 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Net buying of euro as intervention billion kr. 60 40 20 0 -20 -40 -60 -80 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 03-12-2014 DANMARK RKS NATIONALBANK 03-12-2014 DANMARKS NATIONALBANK 6
7 Two ty Two type pes s of f cu curenc ncy movemen ments ts • Own cur urrency ency vs. s. the e rest t • Other er cur urrencies encies vs. s. eacho hother her • Unavoidable risk asscocated with FX • Avoidable borrowing/investing • Reflect risk reward tradeoff. • Reflect exposure against risk minimizing basket. • In Denmark: • Risk vs Euro • Not so simple in other cases •
Co Coordina dinati tion on 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
9 Bo Borrowin wing to to fi fill th the cu currency ency rese serve: rve: Avoid large Av ge net t expo posure sure Currency ncy Central bank Govern ernme ment nt Net DKK -10 +10 0 EUR +10 +10 USD -10 -10 JPY GBP
10 Av Avoid large ge gross ss expo posure sure in hi high risk sk cu curren encies cies Currency ncy Central bank Govern ernme ment nt Net DKK -10 +10 0 EUR 0 USD +10 -10 0 JPY GBP
11 Sm Small ll net t and d gross ss expo posure sure Currency ncy Central bank Govern ernme ment nt Net DKK -10 +10 0 EUR +10 -10 0 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 on DKK billion 15 Coordination 10 5 0 -5 Euro -10 Loss -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 Central bank Net government 14
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 • 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 ordi dination nation of interest rate risk is very challenging
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 16
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