The Eesti Pank investment policy


This document is intended to explain the role, targets and risk tolerance of the Eesti Pank investment portfolio. It is a general guideline for defining and managing how the reserves are invested.


The Eesti Pank reserves are all the financial assets of Eesti Pank except those held for monetary policy purposes. Financial assets may be in euros or in foreign currency.

Two asset classes held as foreign reserves by Eesti Pank are not part of the investment portfolio, and these are gold and the SDRs of the International Monetary Fund (IMF). Eesti Pank’s gold holdings are relatively small and they are managed passively. Eesti Pank also holds the Special Drawing Rights (SDR) issued by the IMF as a unit of account, which it holds as its quota of the capital subscribed to the IMF. The SDRs, like the gold, are not managed actively.

The starting point for investing the investment portfolio of the central bank

Eesti Pank applies the following general principles in managing its reserves.

We start from the principle that financial markets are mostly efficient, but the level of efficiency can vary between markets and across time. Eesti Pank invests the majority of its reserves in efficient markets and considers that indexed investment strategies with lower costs in those markets are generally the most suitable approach for its investments. A stable and diversified allocation of assets between different asset classes with sufficiently low correlation is a general principle followed in the strategic allocation of Eesti Pank’s assets.

Financial markets will not necessarily prove efficient in the short run, and so it is important for the assets in the investment portfolio to be diversified. The short-term inefficiency in markets also justifies temporary deviations in the long-term investment of assets through active management in order to improve the return and risk profile of the investment portfolio.

In reserve management we follow the principles of sustainable and responsible investing, which recognise climate change risk as financial risk. It is consequently in line with the mandate of Eesti Pank as a central bank and the obligation to be credible that we take account of the physical risks from climate change and the risks and opportunities from the transition to a carbon neutral economy.

The goals of the investment portfolio

Eesti Pank holds reserves in order to ensure the credibility of the Eurosystem, support the Estonian economy and financial system, and protect the financial independence of Eesti Pank.

For credibility to be maintained in the Eurosystem, the Eurosystem needs to hold sufficient liquid assets in foreign currency to be able to make the foreign currency transactions that are needed for executing monetary policy. Eesti Pank consequently invests some of its reserves in non-euro area assets, for which the currency risk is left unhedged.

The Eesti Pank reserves are part of the wealth of the nation and form a buffer that can be used as the last resort if there is an economic or financial shock or any other extraordinary event.

Financial independence is important in ensuring the central bank is able to carry out its main monetary policy goal of maintaining price stability. It is set out in the Maastricht Treaty that monetary policy must be carried out independently of governments. The Eesti Pank strategy calls for portfolio investment to earn sufficient income to cover the costs of Eesti Pank and so preserve its financial independence.

The principles of managing the investment portfolio

There are three main principles that are followed given the role of the Eesti Pank reserves, and these are safety, liquidity and return.

Every financial investment has a certain level of risk, and so safety cannot be understood to mean the total elimination of risk. Safety means that the value of the reserves is maintained over a long time. This is achieved by investing the portfolio in different asset classes and so diversifying the investments to keep possible losses at an acceptable level with a degree of certainty. The Eesti Pank Executive Board assesses the level of risk that is acceptable each year.

The Eesti Pank reserves need to be liquid for it to be able to meet its goals. To maintain confidence in the Eurosystem, it has to be possible to realise the reserve held for foreign currency transactions quickly and with minimal losses.

The return on the reserves is also important. The income earned from investment is intended to cover the costs of the central bank and help its capital and reserves to grow, to make sure that Eesti Pank is able to achieve its own goals.

We prioritise principles in investment that meet the goals of sustainable development and that are in line with national and international climate targets, including reducing carbon emissions and achieving a carbon-neutral investment portfolio by 2050.


Decisions about the Eesti Pank investment portfolio are taken at four levels. After the Executive Board has given its confirmation, the Governor of Eesti Pank decides on and is responsible for strategic asset allocation, the size of the portfolio, the content of the portfolio, and the main risk limits. The Governor is advised in those decisions by the benchmark committee. The members of the committee are appointed by the Governor of the central bank, and the work of the committee is led by the Deputy Governor responsible for the investment area. The committee meets at least once a quarter, and the strategic allocation of assets is reviewed at least once a year.

The next level is that the Deputy Governor responsible for the investment area approves the methodology used to compile the investment portfolio.

At the third level, the head of the Financial Markets Department approves the financial instruments that are appropriate for investment and the additional risk limits.

The fourth level is where the portfolio managers execute the agreed investment portfolio and take active positions over the benchmark portfolio within the risk limits that have been set. The bank may also use external asset managers at the level of portfolio investment.

The job of risk management is to make sure that the risks from investment support Eesti Pank in achieving its goals. The risk managers are responsible for calculating the return on the portfolio, keeping the portfolio within its risk limits, and reporting regularly to the Executive Board on the results of the portfolio and compliance with the risk limits.

The parameters of the investment portfolio

The main parameters that are defined for the investment portfolio to make sure that the Eesti Pank reserve is invested in an appropriate fashion are the investment horizon, the target return, and the degree of risk. These parameters are used to set the strategic allocation of assets, which defines how the investment portfolio is allocated across different asset classes.

The investment horizon

Eesti Pank calculates its accounting profit and loss on the basis of the calendar year, and from that determines the change in its capital and reserves together with the amount transferred to the state budget if it has made a profit. The investment horizon used by investment management is however longer than one calendar year and is set at five years. The longer investment perspective is used because except in cases of foreign currency intervention, the Eesti Pank reserves do not need to be realised immediately, and a longer investment horizon allows the balance between the risk and return of the portfolio to be achieved better.

Target return

The first two goals for the reserves do not directly affect the target return of the investment portfolio, but the third goal of financial independence defines the revenue that is expected to be earned from the portfolio. The return on the portfolio should over the longer term cover the operating costs of the bank. It is important to emphasise that the target return is calculated as an average over a five-year investment period, and is not necessarily achieved in each separate calendar year.


The investment portfolio faces various risks. The main ones are:

  • market risk, which is the loss that could be caused if the prices of the invested assets move in the wrong direction;
  • currency risk, which is the loss that could arise if the currency in which the assets are denominated falls against the euro;
  • credit risk, which is the loss that could be incurred if a party who has a financial liability to Eesti Pank becomes unable to fulfil their obligations;
  • liquidity risk, which is the loss that could be suffered if assets have to be sold quickly when conditions in the market are not favourable.

Eesti Pank also acknowledges climate risk as a financial risk, though it is not handled as a separate risk category but as an extension of existing risk categories like credit risk and market risk.

Eesti Pank does not look to eliminate these risks entirely when managing its investment portfolio, but to hold them at a level that is acceptable. Fixed risk limits and maximum risk levels are set in order to achieve this.

Eesti Pank mainly manages market risk using VaR (Value-at-Risk) and duration, and conditional VaR is also used. VaR is a measure of loss that assesses how much investments may lose within a given time horizon with a given probability.

Managing currency risk follows from the general understanding that accepting currency risk must not cause additional costs over the long term. Hedging currency risk also helps to reduce the volatility in the return on the investment portfolio by a substantial amount. Currency risk might not be hedged for some investments so that Eesti Pank can achieve its goals or a better balance of risk and return in the portfolio.

Credit risk is managed by setting minimum credit ratings that should ensure confidence about issuers and counterparties if there is a credit event.

Liquidity risk is managed by holding some of the portfolio in liquid assets that can be realised quickly without any substantial losses.