12. European Central Bank: The Investment Decision-Making Process and Its Governance

This chapter describes the foreign reserve management framework of the European Central Bank (ECB) and the related decision-making process. The ECB’s decentralized foreign reserve management system is unique among central banks around the world, as it involves all of the national central banks which are part of the Eurosystem. This special characteristic influenced the design of the framework, as well as its functioning and governance. The distinctive features of and roles played by the three investment management layers (i.e., the strategic and tactical benchmarks, as well as the actual portfolios) are covered in detail, including the decision-making structure of each level. The chapter describes the evolution of the ECB’s reserve management framework over time which has been shaped by the aims to create incentives to enhance performance and promote risk-taking at various levels, encourage open information and knowledge sharing, as well as support inclusiveness within the Eurosystem. The framework has been periodically adjusted as a result of the inclusion of new members in the Eurosystem and has also contributed to enhancing the absolute return on the ECB’s foreign reserves.