Reserve management at Danmarks Nationalbank : combining liquidity tiers with an adaptive risk budget

Over the recent years, Danmarks Nationalbank has transformed its approach to reserve management. The new framework is organized around two main pillars - a tiered liquidity management framework and an overall risk budget. Together they provide a framework for handling large balance sheet fluctuations - a consequence of the fixed exchange-rate policy - while aligning long-term exposure to investment risk with the primary policy objectives. The anchoring of the risk budget to a "policy portfolio" clarifies the risk and return implications of the bank's multiple objectives and highlights the rationale for diversification.