16. Dynamic Strategic Asset Allocation at the National Bank of Belgium: Why and How to Implement It in a Central Bank

The management of central bank foreign exchange reserves is a topic in which best practices do not remain constant but evolve. For a number of countries, the international reserves have become a significant national asset. For other countries, the reserves are still seen in the context of monetary policy implementation. In most cases, however, the reserves are higher today than they were 10 years ago. Furthermore, new capital markets have opened up and a broader range of financial instruments have been added to the universe of acceptable reserves assets. In all cases, the task of managing these reserves has changed and become more complex. At the same time, public interest has increased and reserves management activities—and their resulting returns—have become more visible. The asset management units within central banks, therefore, do not only have responsibilities towards their own senior management. They are also market participants and public servants. This attention is both legitimate and important. But in all this, their day-to-day portfolio management activities are primarily guided by the traditional trilogy of objectives, i.e. “safety first”, then “liquidity” and finally “return”. These objectives have guided reserves managers over the years and are still valid. But they need an update and an extension in order to meet new multi-faceted challenges. This chapter seeks to show one possible way forward.