Credit risk of the reserve portfolio of central banks

What it is about

Andrés Granados Ruiz, Deputy Director of Financial Risks at the Latin American Reserve Fund (FLAR), presented at the Fourth Annual Risk Conference (September 18, 2026) the FLAR experience in managing the credit risk of international reserves, with its Issuer Monitor.

The 30 slides introduce FLAR, created in 1978 as the Andean Reserve Fund and today with nine Latin American countries, and its dual mandate: to support the balance of payments and to optimize the investment of reserves. They describe the governance of the decision, the investment guidelines, the three-level traffic light system and the evaluation model, which combines an implied market rating, a probability of default model and a fundamental analysis, and close with the Credit Suisse case and the conclusions.

Objectives

• Explain how the credit risk of an international reserve portfolio is managed.
• Describe a traffic-light alert system and its governance.
• Show the combination of external ratings, market signals and fundamental analysis.

Key takeaways

1. The issuer monitor runs every month; an alert triggers an analysis and does not automatically mean selling.
2. The system accepts some false alarms to reduce critical omissions, because for a reserve manager reputational risk makes it especially important to avoid a credit event going unnoticed.
3. The traffic light has three levels: green, ordinary monitoring; yellow, active management with time to analyze and decide; red, non-eligible issuer, which must be liquidated within 30 days.
4. The evaluation combines 20% implied market rating, 40% one-year probability of default and 40% fundamental analysis.
5. External ratings are necessary but not sufficient, and technology facilitates the process without replacing expert judgment; governance ensures independence, escalation and traceability.