sovereign wealth funds

Claire Jones

In the early days of the crisis, Ben Bernanke and Jean-Claude Trichet injected liquidity on an unprecedented scale to prevent a financial meltdown. Central bankers elsewhere did little to help their cause.

In fact, their reserve managers – the people responsible for investing monetary authorities’ foreign exchange stockpiles – made matters worse.

Reserve managers often stash a chunk of their stock piles in short-term bank deposits. But at the start of the crisis, research produced by the IMF found they had pulled about $500bn of deposits from the banking sector, contributing to financial instability in the process. This from the research:

IMF: Although clearly not the main cause, this pro-cyclical investment behaviour is likely to have contributed to the funding problems of the banking sector, which required offsetting measures by other central banks, such as the Federal Reserve and the Eurosystem central banks.

There is, as the paper notes, “a potential conflict between the reserve management and financial stability mandates of central banks”. And so news that Norway’s sovereign wealth fund (managed by the central bank, though the asset allocation strategy is decided by the finance ministry) will take on more risk during downturns is to be welcomed. Read more

Is Norway calling the bottom of global property markets? Its central bank has given approval for its oil-funded sovereign wealth fund to invest up to 5 per cent ($22bn) in the asset class.  “Investments will principally be made in well-developed markets and within traditional types of real estate,” Finance Minister Sigbjoern Johnsen told Reuters. “We must be prepared for real estate prices to fluctuate a good deal.”

Norway has form calling turning points. Last year the fund was allowed to increase its proportion of equity holdings to 60 per cent. During that year, major indices rose about 50 per cent. The fund made 13.5 per cent in Q3 alone. I wonder if they’re planning to reduce the equity proportion now (Bloomberg).