updated in 2013 ) neither directly address the issue of procyclicality, nor do they say that financial stability should in itself be an objective of reserve management. however, there is broad agreement in principle that due attention should be paid to the risk of a potentially disruptive impact of central banks ’ investments on credit and financial markets. the impact of central banks ’ investment strategies and the importance of sound practices are now widely recognised in markets where central banks have become key players and their actions are closely followed by market participants. the recent experience of the euro - area sovereign debt crisis is indicative, not only of the ample space that is available to long - term players to act as ( selective ) contrarian investors, but also of the profitability of doing so. brunnermeier ( 2009 ) and adrian and shin ( 2010 ). pihlman and van der hoorn ( 2010 ). references adrian tobias, hyun song shin ( 2010 ), “ liquidity and leverage ”, journal of financial intermediation, 19 : 418 - 437. bindseil ulrich, fernando gonzales, evangelos tabakis ( 2009 ), “ risk management for central banks and other public investors ”, cambridge university press. brunnermeier markus k. ( 2009 ), “ deciphering the liquidity and credit crunch 2007 – 2008 ”, journal of economic perspectives, 23 : 77 - 100. fanari marco, gerardo palazzo ( 2019 ), “ the strategic asset allocation of the investment portfolio in a central bank ”, paper presented at the bank for international settlementsworld bank - bank of canada - banca d ’ italia seventh public investors conference held in rome at the bank of italy on 22 - 23 october 2018. imf, international monetary fund ( 2013 ), revised guidelines for foreign exchange reserve management, imf, 1 february. lanza ariel, enrico bernardini, ivan faiella ( 2019 ), “ mind the gap, machine learning esg metrics and sustainable investing ”, paper presented at the cemla conference on climate change and its impact in the financial system, mexico city, 5 - 6 december. ngfs, network for greening the financial system ( 2019 ), “ a sustainable and responsible investment guide for central banks ’ portfolio management ”. pihlman jukka, han van der hoorn ( 2010 ), “ procyclicality in central bank reserve management : evidence from the crisis ”, imf working paper no. 150

exercise is not used in a mechanical way to determine actual investment decisions. it is, however, a key benchmark against which all our decisions are discussed. the optimal saa for the investment portfolio takes into account the natural exposure of a central bank to systemic and business cycle risks stemming from its core policy functions. the central bank ’ s financial structure has to be robust, especially in those adverse circumstances in which its institutional duties may require exceptional risks to be taken. this leads us to consider countercyclical and low credit risk assets for inclusion in the saa. such a risk - based approach tends to produce an saa that is consistent with the conservative bias that we want to impart to risk management. moreover, by taking a forward - looking and long - term ( i. e. through - the - cycle ) approach, with clearly defined portfolio rebalancing rules, our optimal saa also contributes to reducing any procyclical bias in portfolio management. exposure towards countercyclical assets reduces selling pressure in times of crisis, when these assets tend to appreciate. this is not just theory. our experience of the last crisis showed that investing in countercyclical assets, such as long - term government bonds and foreign reserves, while maintaining a low exposure to credit risk, paid off in periods of financial distress and provided positive risk - adjusted returns. as a final remark, it may be worth mentioning that the issue of the cyclicality of market investment is not just a concern for the bank as a manager of its own funds : in our capacity as a macroprudential authority, we also see it as one of the main fronts on which financial stability action should advance. 10 financial markets naturally tend to be procyclical. during booms, higher asset valuations provide investors with more collateral to raise funds and ampler financial resources to invest. because of herd behaviour, inflows to asset managers, i. e. to markets, fanari and palazzo ( 2019 ). signorini ( 2019 ). tend to increase when prices are on the rise. both mechanisms, of course, work in reverse during bust phases and may amplify price volatility. 11 not even central banks ’ financial investment has been immune from such behaviour ; the issue of procyclical investment by central banks has indeed been widely debated. 12 some argue that financial stability objectives should not interfere with reserve management. the imf ’ s guidelines for foreign exchange reserve management ( last