According to the Act CXXXIX of 2013 on the Magyar Nemzeti Bank, the MNB shall hold and manage official foreign exchange and gold reserves in order to preserve the external stability of the economy.
In terms of reserve management, the MNB takes a conservative approach: the liquidity limits are tight, the interest rate risk of FX reserves is relatively low, and the credit quality of the reserve portfolios is high.
Purposes of holding reserves
The MNB holds foreign exchange reserves for the purpose of fulfilling several functions:
- to ensure the level of reserves expected by market participants (‘international collateral’);
- to support the monetary and exchange rate policy (providing intervention capacity);
- to provide foreign currency liquidity for the banking sector;
- and to meet the state’s transaction-related foreign currency needs.
The MNB regularly reviews the desirable level of reserves and, if necessary, takes measures – within the applicable framework – to reach the adequate level. The MNB pays special attention to the Guidotti–Greenspan rule, so that the reserves comfortably exceed the level of short-term external debt.
The holding of foreign currency instruments denominated in currencies other than euro is justified by the higher diversification and, in the case of the US dollar, the higher liquidity available.
Sustainablility in reserve management
The MNB’s statutory objectives include, both directly and indirectly, promoting environmental sustainability and addressing the risks caused by climate change. While the primary mandate of the central bank provides opportunities to address climate change, since mid-2021 the ‘green mandate’ has further strengthened this by making the promotion of environmental sustainability an explicit objective. MNB has been gradually implementing these objectives into its reserve management and reporting. MNB also expressed its commitment towards „greening” with publishing the Charter of Sustainable and Responsible Investment.
Risk management
In carrying out its core tasks as stipulated in the MNB Act and especially in the management of the country’s international reserves, the MNB inevitably faces financial (market, credit, liquidity) risks. The basic principle followed by the central bank is that the degree of the assumed risks should be aligned with the objectives of the core activity, the size of the risks should be known and risk assumption should be conscious and limited, in accordance with the institution’s risk-taking capacity. In the course of foreign exchange reserve management, the threefold objective of liquidity, security and yield must be satisfied, meaning that the MNB strives to achieve the highest possible yield level while continuously keeping the risks at a pre-defined low level and maintaining the necessary liquidity.
The benchmark system and the limit system comprise the two main pillars of reserve management. Independent performance measurement is an important element of the risk-taking policy. In order to measure the success of portfolio management, the performance of each reserve portfolio is compared against the performance of a reference (benchmark) portfolio.