Foreign exchange reserves, on the other hand, bear an opportunity cost representing foregone alternative investments. An efficient international currency system based on pooling or similar concepts will require a lower overall amount of reserves. Of course, such an international system requires political agreement and additional administrative costs associated with managing the reserve pool. A further cost is associated with risk.
Credit risk arises whenever a national central bank provides liquidity to domestic counterparties. However, it will also arise when one central bank furnishes liquidity to another central bank, or when the IMF provides liquidity to a national government. Besides, foreign currency reserves fluctuate in value and are therefore also subject to foreign exchange risk.