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Are central banks preparing to prop up stocks directly?

Section: Daily Dispatches

Central Banks Seek Riskier Assets

By Chris Giles
Financial Times, London
Monday, February 26, 2007

Central banks are becoming more active managers of their burgeoning foreign exchange reserves, seeking to increase the yield on their portfolios, according to a survey of reserve managers of the world's central banks published today.

Normally a secretive bunch owing to the conservatism of central banks and the scale of their investments, reserve managers told the journal Central Banking of rising pressures to provide their governments with decent returns in a low-yield environment.

When surveyed at the end of last year, many believed that there was no barrier in principle to investing in assets as risky as equities, although few were allowed to do so. But over a third of the central banks surveyed said their institutions had changed their investment guidelines in the past year.

The survey attracted responses from 47 reserve managers controlling $1,538 billion (E1,168 billion, £784 billion) under management out of a total of more than $4,700 billion controlled by central banks worldwide. Conducted under anonymity, it did not receive responses from China or Japan, which control nearly $2,000 billion between them.

Central Bank reserves have exploded since the start of the decade -- the amount of money under management was £2,000 billion ($2,911 billion, E1,519 billion) in 2001 -- as countries have sought to insure themselves against possible capital outflows and a liquidity crisis and some, such as China, have actively managed their exchange rates to prevent appreciation.

Now that most economists think that reserves have exceeded the required levels for insurance against financial crisis, governments are seeking higher returns from cash, which used to sit mostly in government bonds of advanced economies.

One reserve manager told Central Banking: "Large amounts of reserves increase attention paid by the public on the quality of reserve management and particularly on returns. This requires a more yield-oriented approach."

Another said the move to riskier assets had continued "since the asset classes in which central banks have traditionally invested in have, thus far, not suffered from a major default."

With these attitudes, reserve managers are following the rest of the investment community into riskier assets, rather than standing on the sidelines as they would have done years ago.

Rather than thinking there is a problem with moving into riskier assets just as everyone else is doing so, the reserve managers showed frustration that their internal investment guidelines prevent more risk taking. While only 7 percent of respondents could invest in equities, 44 percent thought there was a case for central banks to buy shares.

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