Own funds reserve management in EURO
Asset management is based on a five-level intervention structure, in addition to risk control:
Level 1: The Council
The Council approves the guidelines of the asset management framework. Thus, the Council has allowed the BCL to provide asset management services to third parties and to hold own fund asset portfolios in order to diversify the Bank’s income. The guidelines also include a risk mitigation framework applied to asset management.
Level 2: The Executive Board
The Executive Board defines the risk management framework. Thus, it determines the maximum risk allowance (MRA) in the management of the Bank’s own assets. It also specifies the risk management measures, like the Value-at-Risk (VaR) method and the application of stress‑testing scenarios. The Executive Board also sets warning thresholds, which can lead to the calling of emergency meetings for assessment and arbitrage purposes. The Executive Board sets the limits of the framework annually.
Level 3: The Asset and Liability Management Committee ALCO
ALCO determines the strategic benchmark according to the framework fixed annually by the Executive Board by examining the impact of each risk profile (market, credit and liquidity risk) which would result from the proposed investment policies, in regards to both the overall balance sheet and the profit and loss account of the BCL. In the course of the year, ALCO regularly assesses the results of the investment policy.
Level 4: The tactical committees
The tactical committees monitor the evolution of the portfolios on a short‑term basis and work out proposals for tactical benchmarks that comply with the limits laid down by the strategic benchmark.
The tactical committees consist of the following:
- The Tactical Investment Committee for own funds in EURO and third party mandates,
- The Foreign Reserves Investment Committee for all USD denominated portfolios,
- The Tactical Investment Committee for the Pension Fund of the BCL.
Level 5: The portfolio managers
The transactions are executed by the portfolio managers, in strict compliance with the limits set, covering both the overall and specific investment limits.
The Risk Management Unit monitors the positions of all the portfolios in order to assess risks and to check compliance with the pre-defined limits. This monitoring is carried out daily and independently from the Front Office. This monitoring structure is reinforced by specific missions allocated at different levels of the organisation and by the monitoring carried out by the Middle and Back Offices.
The investment policy objectives
The main objectives are to generate a high income on a regular basis and to ensure a total return over the long term by taking into account considerations concerning matters such as capital safety, stability of securities and liquidity. In order to achieve these goals and in accordance with the principle of risk diversification, the BCL implements a coordinated, progressive and pro-active investment policy based on modern portfolio theory.
The investment approach takes the following into account:
- the analysis of international economies and financial markets;
- the asset allocation decisions through the assessment of the returns on different international markets;
- the drawing-up of a clearly defined strategy;
- the capital value preservation of the assets under management by a policy of risk diversification and the application of specific qualitative requirements with regard to investments;
- the application of strict risk control measures.
Investment decisions are based on:
- market risks (interest rates, exchange rates, equity prices, commodity prices);
- credit risks (minimum credit ratings criteria by international rating agencies);
- liquidity risks (concentration limits by sector, by issuer, by issue and by geographical diversification).
The quality of the investment decisions is measured by comparing the performance with the external benchmarks of leading investment banks. This allows a given performance to be assigned to a decision level (strategic, tactical) as well as to daily management.