[Gwanga in] "Korea, a Model Case in Foreign Exchange Reserves Management"... The Bank of Korea's Confidence

Southeast Asian and Eastern European Countries Benchmarking BOK
Recognized as a Model Case for Asset Diversification and Risk Management

The Bank of Korea's foreign exchange reserve management method is being utilized as an excellent benchmarking case by central banks of Southeast Asian and Eastern European countries. South Korea is evaluated as a model case for foreign asset management due to its large scale of foreign currency assets (foreign exchange reserves) and accumulated know-how in diversification and risk management of foreign currency assets.

On the 4th, an employee was organizing dollars at the Counterfeit Response Center of Hana Bank's headquarters in Jung-gu, Seoul. South Korea's foreign exchange reserves have increased by nearly 6 billion dollars in the past month. According to the Bank of Korea on this day, as of the end of October, South Korea's foreign exchange reserves stood at 426.51 billion dollars. This is an increase of 5.96 billion dollars compared to a month earlier. This increase is the largest in about two years since January 2018 (+6.5 billion dollars). Photo by Kim Hyun-min kimhyun81@

According to the Bank of Korea on the 24th, this month, employees from the Bangko Sentral ng Pilipinas (BSP), the central bank of the Philippines, visited the Bank of Korea's foreign asset management department to receive training on the Bank of Korea's foreign asset management methods. As BSP's foreign currency assets have recently increased significantly, they are seriously considering asset management and are meticulously studying the Bank of Korea's method, which is regarded as a successful asset management case. BSP showed considerable interest in detailed aspects such as which risk indicators the Bank of Korea measures when managing foreign currency assets, to what extent credit risk and loss risk should be tolerated in investments, and how to set the allowable range.

A senior official from the Bank of Korea explained, "Recently, some central banks in Southeast Asian countries want to learn the Bank of Korea's management methods as their foreign currency assets increase," adding, "South Korea is highly regarded as a model case in foreign asset management."

Deputy Governor Kwon Min-su of the Bank of Korea also contributed an article titled "Diversification, History, and Future Challenges of Korea's Foreign Exchange Reserves" to the Central Banking Publication, a specialized research institution of the Bank of England, in April. In the article, Deputy Governor Kwon stated, "The Bank of Korea confidently asserts that it has successfully achieved the three goals of safety, liquidity, and profitability in managing foreign exchange reserves over the past several decades," and added, "The active and strong efforts toward diversification of foreign exchange reserves are a success factor that is not inferior to any central bank worldwide."

The reason why Korea's foreign asset management method is highly evaluated is due to successful diversified investment relative to the scale of foreign currency assets. As of the end of August, Korea's foreign exchange reserves amounted to $415.92 billion, ranking ninth in the world. According to the 2023 annual report, 10.9% of Korea's foreign exchange reserves are invested in stocks, while the rest consist of government bonds (44.8%), government agency bonds (13.3%), and corporate bonds (10.8%). Compared to other countries managing foreign currency assets, Korea has a higher-than-average proportion of stocks. In other countries such as Japan, most assets are composed of government bonds for stability reasons. Except for exceptional cases like the Swiss National Bank, which is listed and has a high dividend need (stock proportion around 20-25%), it is rare for stocks to hold a high proportion.

A Bank of Korea official said, "Objectively speaking, the Bank of Korea is ahead of other central banks in terms of asset diversification," adding, "Because know-how has been accumulated regarding asset diversification, risk management, and external delegation, questions arise from other central banks or they visit directly when they have inquiries."

The Bank of Korea began diversifying foreign currency asset investments after the 1997 foreign exchange crisis. At that time, as the United States suffered from twin deficits (fiscal deficit and current account deficit), public investors began to reconsider investment practices in dollar-denominated safe assets such as the U.S. Treasury market. Korea recorded current account surpluses annually, securing flexibility to expand its investment portfolio and began investing in new financial products and currencies. Since the 2008 global financial crisis, Korea has been able to pursue a more aggressive investment diversification strategy, supported by a sharp increase in foreign exchange reserves, accumulation of external assets in the private sector, and large current account surpluses. Until before COVID-19, there were no serious financial crises, and the macroeconomic fundamentals were stronger than before, further enhancing the role of foreign exchange reserves from a national wealth perspective.

In the 1990s, the Bank of Korea's foreign exchange reserves were mainly invested in U.S. dollar-denominated time deposits and government bonds of major countries. In the 2000s, diversification began in earnest to secure profitability. In 2005, the size and proportion of mortgage-backed securities (MBS) and corporate bonds were significantly increased, and in 2007, the Bank of Korea began investing in stocks, which was uncommon among central banks at the time. In the 2010s, new investment opportunities within existing asset classes were sought; in 2013, investments began in non-financial corporate bonds and European covered bonds, and recently, corporate bond exchange-traded funds (ETFs) were added.

As a result, the proportion of government bonds fell from about 80% in the early 2000s to the low 30% range in 2008. Meanwhile, the proportion of non-government bond assets tripled to about 60%. After the global financial crisis, risk management was strengthened, gradually increasing the proportion of government bonds and decreasing the proportion of risky assets. Recently, the allocation to government bonds is maintained at about 40%, and stock allocation is kept in the low teens.

Besides foreign asset management, the Bank of Korea exchanges knowledge with other central banks on financial stability and payment systems. The Knowledge Partnership Program (KPP), launched in 2015, is a project where the Bank of Korea provides policy advice and technical support to central banks of 10 Asian countries including Nepal and Laos. In this process, the Bank of Korea shares experiences in managing foreign exchange reserves and provides comprehensive policy consulting on financial stability, economic research, and payment systems.

Since 2003, the Central Banking Study Program has been conducted annually to train employees of central banks in developing countries. Three to four courses related to specific topics such as financial stability are held each year, with lectures by experts from the Bank of Korea or other institutions. Participants share their own policy experiences through panel discussions.

Another senior official of the Bank of Korea said, "Like the government's Knowledge Sharing Program (KSP), the Bank of Korea also provides experience training to other central banks on payment systems and central bank lending systems."