Philipp Hildebrand: The challenge of sovereign wealth funds Speech by Mr Philipp Hildebrand, Vice-Chairman of the Governing Board of the Swiss National Bank, at the International Center for Monetary and Banking Studies, Geneva, 18 December 2007. I would like to thank Signe Krogstrup for her valuable support in drafting this speech. I also want to thank Rita Kobel, Urs W. Birchler, Daniel Heller and Bertrand Rime for helpful comments and discussions. * 1. *  *  Introduction  I am very pleased to be in Geneva. The International Center for Monetary and Banking Studies (ICMB) provides a wonderful platform to discuss a wide range of economic and monetary policy challenges. On behalf of my ICMB Foundation Board colleagues, I would like to thank Charles Wyplosz for his successful and long-standing stewardship of the ICMB. Tonight, I want to talk about Sovereign Wealth Funds (SWFs). Broadly defined, SWFs are government-owned investment corporations. For the most part, they invest their funds in foreign currency assets. SWFs are usually managed separately from central bank reserves. Unlike other publicly owned pools of capital, such as social security funds or public pension funds, SWFs have no explicit liabilities. As you can see in slide 1, the estimated assets currently managed by SWFs exceed the combined pool of assets managed by hedge funds and private equity firms. Total assets held by SWFs remain small, however, in comparison to the combined assets managed by pension funds and mutual funds worldwide.
As you know, the GIC recently committed to subscribe to CHF 11 billion of a mandatory convertible bond which will be issued by UBS in an effort to raise capital in the aftermath of losses on large sub-prime mortgage positions. Subject to the UBS shareholders’ approval, the GIC will in due time become a significant shareholder in UBS. In the process, UBS will significantly strengthen its balance sheet and thereby maintain a substantial capital cushion relative to the regulatory minimum. A strengthened capital cushion is to be welcomed. First and foremost, it serves as a confidence-building measure. Moreover, in uncertain times, a solid capital cushion provides insurance against a further potential deterioration in the global macroeconomic environment. Who is this new Asian investor in the largest Swiss bank? The GIC was set up in May 1981 with an original seed capital of several billion dollars from the Monetary Authority of Singapore (MAS). 28 The central bank reserves had grown steadily throughout the 1970s as a result of public sector surpluses. The GIC’s objective was to invest the portion of foreign reserves, which was surplus to the needs of the central bank for its monetary policy management, in longer-term assets. The mandate of the GIC is to preserve at a minimum the international purchasing power of its assets against inflation and global exchange rate risk. The objective of the GIC is commercial, focusing on long-term investment returns. In many ways, it is similar to the objectives of the large European public pension funds.