Why central banks with shareholders might not be such a bad idea after all

The National Bank of Austria, the most recent example of central bank nationalisation. Reuters

The ownership structure of central banks has been the subject of considerable change during the past 80 years. Today most central banks in the world are publicly owned, while this was not the case before World War 2. Yet an eclectic number of central banks with private shareholders still remain. Little has been written about them.

The wisdom of retaining a system of private shareholders for this select group of central banks has been questioned. Such questioning is indeed justified, given the 2010 nationalisation of the Austrian central bank, as no major policy, system or financial changes followed in Austria after nationalisation. It was business as usual, albeit with a new ownership structure for the central bank.

Central banks in private ownership are to a certain extent a relic of the past. This is because the model of private ownership of central banks was not adopted after World War 2, with the exception of Pakistan, and in this instance the central bank was nationalised in 1975.

The trend of nationalising central banks started in 1935. Nationalisation was part of an approach of “big government” in the aftermath of the Great Depression.

The first central bank to be nationalised was the Reserve Bank of New Zealand where the state accepted responsibility for a wide range of functions in the economy.

Why it’s not a bad idea

The remaining privately owned central banks make up a very short list. They can be found in Belgium, Greece, Japan, South Africa, Switzerland and Turkey. The Bank of Italy and the 12 Federal Reserve Banks in the US allow shareholding by commercial banks only.

These central banks all have different shareholding structures. Nor do all shareholders enjoy the same rights as each institution has different dividend policies and governance structures.

Despite views that it might be a superfluous relic, a private ownership structure adds to the transparency and accountability of central banks.

Although private shareholders have no say over decisions about monetary policy, these central banks report on these decisions to their shareholders. Nothing is therefore lost by retaining this extra layer of control, thus enhancing governance, accountability and transparency.

With the exception of the 12 Federal Reserve Banks which have commercial banks in their Federal Reserve districts as shareholders, the remaining central banks have shareholders in the conventional sense of the word.

Research shows that central bank shareholding still has a role to play in the structures.

The research highlights a number of conclusions. First, from an investment return perspective, only the central banks of Belgium and Greece (albeit only for residents in the latter instance) can be considered a growth investment by investors. In all other instances dividends are fixed by law and shareholders do not share in the profitability of the central banks.

Secondly, in the case of Italy, the shareholding in the central bank has been used as an instrument to recapitalise ailing commercial banks. Shareholding by commercial banks provided an opportunity to assist commercial banks in financial distress. The capital of the bank was revalued in 2014 to €7,5 billion. This revaluation resulted in an improvement of the capital position of Italian banks holding shares in the central bank.

The financial beneficiaries of the revaluation were the two banks with the largest shareholding in the central bank, namely Intesa Sanpaolo and UniCredit CRD.MI. The revaluation also benefited Banca Monte dei Paschi Siena and Banca Carige, two banks that were experiencing financial difficulties. As a result of the revaluation Banca Monte dei Paschi Siena and Banca Carige could show an increase in their asset holdings and therefore an improvement in their solvability ratios.

This is the only such example of emergency liquidity assistance to ailing banks. But this approach could be replicated if it was ever needed by the 12 Federal Reserve Banks in the US, as these institutions only have banks as shareholders, as is the case in Italy.

Thirdly, a central theme that emerges is that shareholders play no role in the formulation and implementation of monetary policy. This implies that shareholders cannot manipulate monetary policy decisions in an attempt to reap personal benefits.

Naturally this is of no consequence at the 12 Federal Reserve Banks, as monetary policy formulation is entrusted to the Board of Governors of the Federal Reserve System, rather than the Federal Reserve Banks. In the case of the other central banks with private shareholders, the implication is that shareholders are excluded from the core function of these institutions.

Lastly, the shareholding structure of these banks contributes to improved governance in the case of the central banks of Belgium, Greece, Italy, South Africa, Switzerland and Turkey.

The shareholding in central banks delivers various benefits and options of benefits, depending on the shareholding structure and profit policy of each institution. However, it remains a question whether any of the remaining central banks with shareholders will follow the recent example of Austria.