Equities holdings at central banks becoming a worry
By DAVID MARSH
The Business Times, Wednesday, June 18, 2014
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CENTRAL banks have leapt to the forefront of public policy-making.
They have taken responsibility for lowering interest rates (and keeping them low), maintaining stability of financial institutions and markets, and buying up large-scale 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 over-stretching 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 large-scale survey compiled by the Official Monetary and Financial Institutions Forum (OMFIF), a global research and advisory group. The OMFIF research publication Global Public Investor (GPI) 2014, launched yesterday, is the first 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 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 (NBIM), 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 NBIM 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 (GPIF), 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 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 2013.
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 OMFIF calculations, central banks around the world have forgone US$200 billion to US$250 billion in interest income as a result of the fall in bond yields in recent years.
GPIs 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 transparency and accountability of official asset management. Sovereign funds have adopted the so-called Santiago Principles on transparency, but central banks have not signed up to any comparable code.
Edwin “Ted” Truman, a former senior Federal Reserve official and now a senior fellow of the Peterson Institute for International Economics, writes in GPI 2014: “One of any government’s major responsibilities is managing the country’s international assets. Reforms are urgently needed to enhance the domestic and international transparency and accountability for this activity – in the interests of a better-functioning world economy.”
The writer is managing director and
founder of the Official Monetary and
Financial Institutions Forum
An April 9 report by Martin Gilens, a professor of politics at Princeton University, and Benjamin Page, a political science professor at Northwestern University, finds that the majority does not rule in the United States. The researchers further conclude “that if policymaking is dominated by powerful business organizations and a small number of affluent Americans, then America’s claims to being a democratic society are seriously threatened.”
Gilens’ and Page’s paper is entitled “Testing Theories of American Politics: Elites, Interest Groups, and Average Citizens.”
Since the report’s conclusions fit the definition of an oligarchy — a form of government in which power rests with a small number of people — many journalists immediately seized on that term to describe Gilens’ and Page’s findings. And while the authors did refer to the term in their report (e.g., “Most recently, Jeffrey Winters has posited a comparative theory of ‘Oligarchy,’ in which the wealthiest citizens — even in a ‘civil oligarchy’” like the United States — dominate policy concerning crucial issues of wealth- and income-protection”) they did not, themselves, use the term to describe the current U.S. power structure.
