Survey of 91 central banks managing more than $7trn in foreign exchange assets finds geopolitical escalation is the most significant risk facing reserve managers in 2024. New data shows most reserve managers incorporate geopolitical risks into their reserve management – and 30 central banks reported already making at least one change as a result. An overwhelming majority (93.2%) believe AI has the potential to optimise their portfolios to mitigate risks.

Immediate release Monday, April 15, 2024, 07:00 BST

Geopolitical escalation is the most significant risk that reserve managers face in 2024, according to the latest Central Banking and HSBC’s Trends in Reserve Management survey of 91 central banks, published today. Following the eruption of the war in Gaza that threatens to destabilise the Middle East and Red Sea supply chains, of 87 respondents to this question, 31 (35.6%) voted it their most pressing concern, and one that can trigger inflationary and energy shocks.

“The Israel-Hamas war, with the resulting attacks by the Houthi rebels on vessels passing through the Red Sea, can affect the global economic landscape and impact reserves,” said one official from a lower-middle income central bank in Africa. “Geopolitical escalation, in particular over Taiwan, could significantly impact global growth trajectories and supply chains,” said an official from a high-income central bank in Europe.

Geopolitical tensions can trigger energy shocks that would “put additional pressures on central banks to revisit the trajectory of their monetary policy rates”, an official from another high-income central bank in Europe added.

This marks a shift from the survey last year. Despite unprecedented sanctions on the Bank of Russia’s reserves due to the invasion of Ukraine in February 2022, of 79 central banks, only 13 (16.5%) had said geopolitical risk was their main concern. US Fed monetary policy error and volatile inflation were voted the second and third most significant risks facing reserve managers this year.

Most reserve managers, 59 out of 88 respondents (67.0%), said they incorporate geopolitical risks into their risk management and asset allocation decision-making. Thirty central banks have already made at least one change to their reserve portfolio management due to geopolitical risks. Twenty-five are considering making changes.

Among 56 central banks that gave details of the areas of reserve management impacted, reserve managers most commonly made changes to the location of investments, followed by changes with respect to their counterparties and the currencies invested in.

Separately, 64 of 85 respondents (75.3%) suggested that de-dollarisation of foreign exchange reserves will only continue gradually, and not accelerate.

A belief in the promise of AI

An overwhelming majority of central bank reserve managers view the potential of artificial intelligence positively, with 82 out of 88 (93.2%) agreeing that they think it will help to optimise their portfolios in areas such as rebalancing strategies, risk-adjusted returns and tax efficiency.

“AI can identify optimal asset allocation, rebalancing strategies, risk-adjusted returns, and tax efficiency for each portfolio,” said an official from an upper-middle income central bank in Africa. Through discovering and analysing correlations between different assets, sectors and regions, AI can advance optimal diversification strategies to reduce portfolio risks, they added.

Among the 82 reserve managers that said reserve managers’ operations will benefit from AI, reporting came out as the top area (70, or 85.4%). Trading and execution (58, or 70.7%), risk management (55, or 67.1%) and portfolio management (54, or 65.9%) are also areas in which central banks said AI can improve their operations.

Over half of reserve managers said strategic asset allocation (48, 58.5%) and cyber security (44, 53.7%) have potential AI applications. An official from a high income European central bank warned, however, that although “AI could improve data management”, such processes are also connected to significant cyber security, data mismanagement and operational risks.

“AI has only started, and its potential is large. It will become a normal tool for all reserve managers,” said another official from a high income central bank in Europe.

The survey is the first chapter in the new book HSBC Reserve Management Trends 2024,which is published by Central Banking Publications and sponsored by HSBC. It is the 20^th edition in a series of annual reviews of reserve management. The survey was carried out between January and February 2024. In total, 91 reserve managers – responsible for over $7 trillion in reserves – participated, up from 83 last year.

Commenting on the survey, Bernard Altschuler, Global Head of Central Bank Coverage at HSBC, said: “A heightened focus on geopolitical risk and the implementation of strategies to address these concerns is a particularly striking outcome from this year’s survey – 30 central banks, up from 13 in 2023, have already made changes.”

“Counterintuitively, de-dollarisation of FX reserves is not expected to accelerate. Another eye-catching result is an overwhelmingly positive view of the potential of AI to help optimise reserve management operations,” he added.

A media copy of the survey chapter is available on request. For more information, contact Joasia E. Popowicz, Editor, HSBC Reserve Management Trends 2024: +44 20 7316 9133, j.e.popowicz@centralbanking.com.

For HSBC enquiries: Alex Fletcher, Senior Media Relations Manager, Global Banking: +44 7387 244 922, alexandra.fletcher@hsbc.com

Notes for Editors

1. A media copy of the survey is available on request. For details of survey respondents, see pages 3 and 4 in the survey chapter.
2. HSBC Reserve Management Trends 2024 is sponsored by HSBC, and published on April 15, 2024, by Central Banking Publications. Contact Joasia E. Popowicz, j.e.popowicz@centralbanking.com, for more details.
3. Central Banking Publications, a division of Infopro Digital, is dedicated to the reporting and analysis of central banks and international financial institutions. See centralbanking.com.