Christian Noyer: Foreign reserve accumulation – some systemic implications
Speech by Mr Christian Noyer, Governor of the Bank of France, at the Salzburg Global Seminar, Salzburg, 1 October 2007.
The management of international reserves
"...High current account surpluses mechanically reflect an excess of domestic (private or public) savings, which must be invested abroad. But in East Asia and commodity-exporting countries, these accumulated excess savings appear to be largely held by sovereigns. In addition to foreign exchange reserves, a growing part of these foreign assets is now invested through sovereign wealth funds (SWFs).
For the time being, the assets managed by SWFs (around USD 2.5 trillion) are relatively small compared with the global capitalisation of bond and equity markets – about USD 100 trillion – or even compared with the holdings of the private asset management industry (pension, insurance and mutual funds), estimated at around USD 55 trillion. However, according to some estimates, SWF assets could more than treble over the next 5 yearsyears and reach around USD 8.5 trillion in 2012. All SWFs share a common purpose which is the transfer of wealth across time. The objectives of central banks are different, namely to foster price stability and financial stability. Besides, central banks may be more sensitive to headline risk, and exposure to large losses could damage their credibility. Creating an entity separate from the central bank, an SWF, in order to manage risky assets has often been seen as a good governance structure. Such a structure is also expected to set up a Chinese wall between central banks and SWFs, eliminating the risk of trading based on insider policy information. The effectiveness of such segregation may yet be challenged, but more importantly, it may not completely prevent conflicts of interest. A distinction probably has to be made between commodity and non-commodity SWFs. In oil-producing economies, foreign asset accumulation stems from oil royalties reflected in large government budget surpluses, so that their management by public entities is a natural outcome. The funding of commodity SWFs stems from a domestic resource that is most of the time owned, exploited or taxed by the government: in this respect it is genuine sovereign wealth, and the result of public savings. By contrast, foreign reserves and SWF accumulation that is not commodity related might be seen as primarily a diversion of excess private savings..."