Because of the potential for rapid outflows and the associated liquidity risks, EMEs have tended to build up reserves as a means of self-insurance. During the recent crisis, EMEs which had built up reserves as self-insurance found that they could weather the crisis more effectively.
The very possession of an ample level of reserves helped to maintain market confidence as measured by lower spreads on credit default swaps and also blunted the penetration of the crisis in these economies. 9. Such self insurance has, however, faced intellectual inclement. It has been criticized as being costly and inefficient and also as contributing to global imbalances.