Transparency needed in central banks' equity buying binge
They have binged on the markets, but overstretched central banks and sovereign wealth funds now need to add transparency to their reserves
Central banks have leapt to the forefront of public policymaking. They have taken responsibility for lowering interest rates (and keeping them low), for maintaining the stability of financial institutions and markets and for buying up large quantities of government debt to help economies recover from recession.
Now it seems that they have become important, too, in building up holdings of equities to increase depleted yields on their much-increased reserves of foreign currencies.
Central banks may be overstretching themselves.
Jens Weidmann, president of Germany's Bundesbank - which retains a highly important role in the euro area - spoke yearningly last week of the need for "central banks to shed their role as decision-makers of last resort and, thus, to return to their normal business".
He said this "would help to preserve the independence of central banks, which is a key precondition to maintaining price stability in the long run".
Central banks' foreign exchange reserves have grown unprecedentedly fast - especially in the developing world.
The same authorities that are responsible for maintaining financial stability are often the owners of the large funds that add to liquidity in many markets and can cause the risk of overheated asset prices.
Evidence of equity buying by central banks and other public-sector investors has emerged from a new, comprehensive survey of US$29.1 trillion worth of investments held by 400 public-sector institutions in 162 countries. The report focuses on investments by 157 central banks, 156 public pension funds and 87 sovereign wealth funds.
Sovereign wealth funds and public pension funds are well known to have become large holders of company shares on international stock markets.
The best-known example is the Norwegian sovereign fund Norges Bank Investment Management, with US$880 billion under management, of which more than 60 per cent is invested in equities. The fund owns, on average, 1.3 per cent of every listed company globally.
It now appears that it has rivals from a number of unexpected sources. One is China's State Administration of Foreign Exchange (SAFE), part of the People's Bank of China (PBOC), the biggest overall public-sector investor, with US$3.9 trillion under management - well ahead of the Bank of Japan and Japan's Government Pension Investment Fund, each with US$1.3 trillion.
SAFE's investments include significant holdings in Europe. The PBOC itself has been directly buying minority equity stakes in important European companies.
Another large public-sector equity owner is the Swiss National Bank, with US$480 billion under management. The Swiss central bank had 15 per cent of its foreign exchange assets - or US$72 billion - in equities at the end of last year.
Central banks have been trying to compensate for lost revenue caused by sharp falls in interest rates driven by official institutions' own efforts to repair the financial crisis.
According to calculations by the Official Monetary and Financial Institutions Forum, central banks around the world have foregone US$200 billion to $250 billion in interest income as a result of the fall in bond yields in recent years.
Public-sector investors as a whole appear to have built up their investments in publicly quoted equities by at least US$1 trillion in recent years, in a trend that is now probably irreversible.
These shifts have important implications for the transparency and accountability of official asset management. Sovereign funds have adopted the Santiago Principles - a set of voluntary guidelines - on transparency, but central banks have not signed up to any comparable code.
Edwin Truman, a former senior US Federal Reserve official, now a senior fellow of the Peterson Institute for International Economics, says the time for such a code is ripe. Truman argues that one of any government's major responsibilities is managing the country's international assets.
In his analysis, reforms are urgently needed to enhance the domestic and international transparency and accountability for this activity.
Delivering such reforms would clearly be in the interests of a better-functioning world economy. At this critical juncture for central bank policymaking, the need for improving transparency is arguably growing increasingly urgent.
David Marsh is managing director and founder of the Official Monetary and Financial Institutions Forum