The Bank of Israel portfolio has lost hundreds of millions of dollars “on paper” according to a theoretical calculation by “Globes” based on the composition of the portfolio and the performance of indices relevant to its componentparts over the past month.
The loss is onlya fraction of a percent of the total holdings in theportfolio $90.6 billion which is mainly invested in US government bonds and other Western government bonds.
However, an increase in the portfolio’s exposure to stocks in the past two years has led to higherunrealized losses. The Bank of Israel’s corporate bonds portfolio, which was created this year, has not sustainedcapital losses similar to bank’s holdings of shares because the bonds are investment grade, whilethe losses seen on the markety since the beginning of the year have mostly been in junk bonds, a high proportion of the issuers of which areenergy companies.
Israel’s foreign exchange reserves crossed the $90 billion mark for the first time at the end of 2015. At the end of the December, the reserves reached $90.6 billion, representinga $6 billion increase during 2015. Underthe Bank of Israel Law, the foreign exchange reserves are managed by the Market Operations Department.
Until 2012, the Bank of Israel only invested itsforeign currencyreserves in safe short-term government bonds. In 2010, the Bank of Israel Law was amended to allow the bank to invest in nearly all assets suitable for investment, including shares, corporate bonds, and derivatives.
The amendment also set “earning a reasonable return” as one of the three goals for the department’s foreign currency reserves portfolio, alongside maintaining purchasing power and managing the reserves at a high level of liquidity.
Starting in 2012, the bank purchased shares according to a ceiling set by the Monetary Committee which supervises the investment unit. Over the past two years, the committee has relaxedthe restrictions on the investments and raised the ceiling for shares to 12% of the portfolio.
Speaking to “Globes”, the head of the foreign exchangestrategic management unit, Dr. Golan Benita, said the Bank of Israel was one of the first central banks in the world to enter the stock market.
Furthermore, at the end of 2014, the Monetary Committee approved an upper ceiling of 6% of the portfolio for investment-grade (BBB- and above) corporate bonds.
A comparison of central banks places Bank of Israel in third positioninexposure to shares at least among central banks that publicly report the composition of theirforeign currency portfolios.
The Swiss National Bank was first on the list, with 16% exposure; the Czech National Bank was second (9.8%); followed by the Bank of Israel (8%),the Bank of Korea (6.1%), and the central bank of the Netherlands (1.6%).
Published by Globes [online], Israel business news - www.globes-online.com - on January 26, 2016
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