Investment management is one of the cornerstones of Latvijas Banka. It ensures that the operational costs of the central bank are covered and the respective share of profits is paid into the government budget. Latvijas Banka manages financial assets by investing them in safe and liquid financial instruments.

The Council of Latvijas Banka approves investment management guidelines that rely on the principles of prudent management. Investments are managed to ensure the following in the medium-term:

  • preserving their value;
  • maintaining their liquidity;
  • income generation.

In making decisions about the scope of investments, the Council of Latvijas Banka is guided by the Agreement on Net Financial Assets of Eurosystem central banks.

Investment structure

Diversification is one of the primary strategies used in the investment management. Latvijas Banka mostly invests financial assets in debt securities issued by the governments of EU countries and the US government, government agencies and international organisations, asset- backed securities, highly rated bank and corporate debt securities, debt securities issued by the governments of developing countries, as well as equities included in the developed countries equity index.

At the end of 2021, the total value of investment portfolio of Latvijas Banka was 6.2 billion euro.

The changes in the investment structure are made to increase diversifica- tion and secure higher income in relation to risk over the medium and longer term. Thus, in 2021 Latvijas Banka continued to increase its invest- ments in the equities of developed markets, as well as invested in equities and government debt securities of emerging markets.

Chart 1
Investment structure (billions of euro)

Investment management organisation

To manage investments, Latvijas Banka uses internal and external asset managers, and investments comprise three main assets classes: fixed income securities, equities and gold.

  • The largest share of fixed income securities is managed by Latvijas Banka. The benchmark portfolio of the financial assets managed by Latvijas Banka consists of the weighted index of the US and Canadian government 1–3 year and euro area and UK government 1–10 year securities. The benchmark currency is the euro, and the benchmark assets are composed of 55% US dollar-denominated, 21% euro-denominated, 14% British pound sterling-denominated and 10% Canadian dollar-denominated assets. To manage fixed income securities, Latvijas Banka uses seven external asset managers. External asset managers manage part of financial assets of Latvijas Banka according to the guidelines and criteria set by the Council of Latvijas Banka.
    • Six managers manage mortgage-backed securities portfolios.
    • One manager manages investments with the same benchmark as the internally managed portfolio of Latvijas Banka.
    • Investments in the investment grade fixed income government securities of developing countries are invested via exchange-traded fund (ETF).
    • All investments in fixed income securities are hedged to euro.
  • Developed markets equity portfolio encompasses the largest share of equity investments and it is managed neutral to the respective equity Developed markets equity portfolio is managed by an external asset manager. Emerging market equity portfolio is managed neutral to the respective equity benchmark and investments are made using an ETF.
  • The share of gold in the total investments of Latvijas Banka stored at the Bank of England is slightly higher than 5%.

Similar to other euro area central banks, Latvijas Banka has transferred a small share of its financial assets to the ECB to be included in the ECB's foreign reserves. The ECB reserves are managed by central banks of the Eurosystem, where each of the national bank receives a share of financial assets (according to their capital key at the ECB) that they manage according to the ECB's guidelines.

Together with Oesterreichische Nationalbank, Latvijas Banka manages the foreign reserve assets in Japanese yen transferred to the ECB.

Risk management

Risk management and control is an integral part of investment manage- ment. Risk management entails risk scenario calculations, assessments of potential loss in the worst-case scenarios and modelling of an optimal asset allocation. The investment portfolio's compliance with the guidelines and the risk allocation in accordance with investment decisions is monitored and controlled on a daily basis.

The interest rate risk is one of the most important risk factors that affects investments of Latvijas Banka. In managing investments, the focus is on government 2, 5 and 10-year bond interest rates. During 2021, interest rates increased significantly in all markets and finished the year at the highest levels, having a negative impact on the short-term value of the fixed income investment portfolio.

Chart 2
Interest rate dynamics of government securities (interest rates, %)