What Are Reserve Assets? Definition & Importance

What Are Reserve Assets?

Reserve assets are assets held by a government that can be converted into cash in a short time and be used for payments or to prop up its national currency. This type of asset can be held at a country’s central bank, its treasury or finance agency, or both.

What Reserve Assets Does the U.S. Hold?

The Federal Reserve keeps track of the reserve assets of the U.S., which come in the form of gold stock, special drawing rights, a reserve position in the International Monetary Fund, and foreign currencies. These reserves are typically held by the U.S. Treasury.

Gold Stock

Gold stock refers to gold held at the U.S. Treasury that can be used to mint coins. It doesn’t, however, include gold that is held at Federal Reserve banks on behalf of other countries and international accounts. Gold is priced at its book value, which is the total number of troy ounces multiplied by the value set in 1973 at $42.222 per ounce.

Special Drawing Rights

Special drawing rights are a type of international monetary asset created by the IMF in 1969 to supplement the official reserves of member countries. It’s based on a weighted basket of currencies, of which the values are based on market exchange rates at a particular time. SDRs can be used to settle financial obligations from one member country to another, and to provide loans.

Reserve Position in the International Monetary Fund

The reserve position is the amount of its reserve tranche—which is the amount of foreign currency the Treasury (or a member country of the IMF) can withdraw from the IMF at short notice—and any debt with the IMF.

Foreign Currencies

Foreign currencies are a means of holding cash denominated in other nations that can be converted into the base currency of a country. The U.S. Treasury holds primarily euros and yen as foreign currencies. This would be known as international reserves.

Why Are Reserve Assets Important?

The dissolution of the Bretton Woods system in the 1970s brought on a new monetary system in which a country needed to develop its reserve assets since gold was no longer the standard to back a nation’s currency.

A country holds reserve assets to help meet balance of payments purposes. For example, a government can sell some of its reserve assets to devalue or prop up its currency. Selling foreign currencies is one method a country can use to boost the value of its own currency via the foreign exchange market.