Holding and managing the foreign currency reserves of the State
Section 4(2) of the Law states that one of the functions of the Bank of Israel is "Holding and managing the Foreign Currency reserves of the State."
The reserves serve two purposes: (1) potential uses of the reserves, i.e., the possibility of selling them (in exchange for domestic currency) or lending them, with the main use being the sale of foreign currency to the government for the servicing of its debt; and (2) economic utility arising from the very fact that the State of Israel possesses a certain quantity of foreign exchange reserves, such as reducing the probability of a crisis in Israel's foreign exchange market and improving Israel's international financial standing. The functions of the reserves serve as a basis both for determining their desired size and for defining the investment policy that the Markets Department uses in managing them.
The Bank of Israel, like other central banks, manages the reserves on the basis of a cautious approach that has three main goals in mind:
- preserving the value of the reserves in terms of their uses;
- managing the reserves at a high level of liquidity;
- earning a reasonable yield on the reserves portfolio without contravening the previous two principles.
Accordingly, the reserves are invested primarily in liquid or relatively short-term assets and in a mix of currencies that corresponds to the reserves' expected uses. The reserves are invested in overseas financial markets, deposits with foreign banks, foreign government bonds, and other financial instruments as the Bank of Israel Law allows. To make its investment decisions and determine changes in the portfolio, the Department constantly monitors developments in financial markets abroad.