Due to the lower capitalisation of local stock and bond markets, economic performance in DM Low FME countries is relatively less vulnerable to financial shocks than in DM High FME markets, giving Low FME central banks greater freedom to invest in higher risk asset classes. Furthermore, whereas most High FME central banks self-assess ‘ample’ reserves adequacy, the majority of Low FME central bank respondents describe reserve levels as ‘sufficient’, and are therefore more likely to seek higher returns through the investment tranche to improve their long-term reserves adequacy position (figure 31). Typically, emerging market central banks have the lowest levels of reserves adequacy due in large part to greater vulnerability to foreign shocks. Indeed, certain emerging market central banks with a currency peg noted that falling commodity prices had created pressure on the local currency, causing a drawdown of foreign reserves to maintain the peg. Countries with more flexible exchange rate arrangements are instead seeking greater exposure to risk asset classes to generate positive returns to preserve capital and maintain reserves adequacy. Fig 31. Investment tranche usage (% citations) mm EM DM Low FME DM High FME 63 87 50 Sample comprises of central banks only. Sample: DM High FME=6, DM Low FME=6 and EM=22. Note low sample. DM High FME=High financial market dependency. DM Low FME=Low financial market dependency. 40 HOUSE_OVERSIGHT_026720