Bank of Israel Report on Investment of Foreign Exchange Reserves Published Today:Average level of the Bank of Israel's foreign exchange reserves in 2006 was about $28 billion

20.6.07
 
Bank of Israel Report on Investment of Foreign Exchange Reserves Published Today
Average level of the Bank of Israel's foreign exchange reserves in 2006 was about $28 billion.
 

The Bank of Israel’s Foreign Currency Department today issued its Annual Report, which analyses the investment of the Bank’s foreign exchange reserves.
Highlights of the report:
  The average level of the Bank of Israel's foreign exchange reserves in 2006 was approximately $28 billion, an increase of $1 billion from their average level in 2005, equal to 4.8 months' worth of imports or about 75 percent of Israel's short-term foreign debt, a decline of 0.2 months and of 4 percentage points, respectively, vis-a-vis 2005.
  There was no change in the framework of the management of the reserves in 2006, which was based on the potential uses of the reserves and their benefit to the economy. The management framework was under review in 2006, a process which continues.
  The holding period rate of return on the reserves in 2006 was 3.8 percent (in currency numeraire terms), up from 2.6 percent in 2005. The return reflected the rise in yields to maturity in the capital markets in which the reserves were invested during the year, which led to rising interest income accompanied by capital losses.
  In 2006 the actual holding period rate of return was 12 basis points higher than that of the neutral benchmark, a spread that reflects the contribution of active management of the portfolio. As in previous years, most of the incremental yield derived from asset selection.
  The exposure of the reserves to the international banking system was on average 32 percent of the reserves. This exposure is managed under a system of quotas and rules, which plays a central role in the credit-risk management of the portfolio.
  The reserves are very liquid: about 92 percent of the portfolio is invested in highly liquid assets and the rest in assets with lower liquidity.
  With reference to the risk-return profile appropriate to the reserves, several changes in investment policy were made during 2006, including—
Ø Increasing the exposure of the reserves portfolio to interest-rate risk.
Ø Expanding the scope of investment in mortgage-backed securities under external management.
Ø Adding a number of additional countries which have investment-grade credit ratings to the list of those countries eligible for investment of the foreign currency reserves.
  In common with the central banks of other developed countries, the Bank of Israel manages the foreign exchange reserves according to an investment policy which is founded on three principles: maintaining the value of the reserves in terms of their intended uses; managing the reserves with a high degree of liquidity; achieving a reasonable yield on the reserves portfolio, subject to the other two principles.
 
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