As a result the build-up in EME foreign assets have been held mainly as central bank reserves especially in Asian countries (Chart 3). In total the foreign assets now held by EME central banks and governments is about $ trillion dollars, which compares with only $ billion gross foreign assets held by the UK government. Many emerging economies concluded after the Asian crisis a decade ago that they needed bigger liquid reserves in traditional government debt to defend themselves against volatility in financial markets even when that carried the likelihood of a negative return (taking account of expected exchange  2  The Kuwait Investment Office is the in-house investment arm of the Kuwait Investment Authority (formerly known as the Kuwait Investment Board) and was established by Sheikh Abdullah Al-Salem Al-Sabah on 23 February 1953. Edmund Hillary and Tenzing Norgay reached the summit on 29 May 1953. 3  These figures include the NICs. Excluding NICs the estimated surplus is $ billion (1.1%). 4  Latest data show that current account deficits were 5% of GDP or above not only in the United States but also in Spain, Greece, Portugal, Australia, New Zealand, UK and Iceland. 2  BIS Review 31/2008  rate movements). But when the reserves outstripped the levels needed for that purpose, it was natural to look to increase the returns on investment by widening the range of investments.
The Walker Report recommends a set of guidelines for disclosure and transparency by private equity funds, including the publication of regular information on their financing, ownership and prospects. 4  BIS Review 31/2008  Sovereign wealth funds and global imbalances However, the emphasis on transparency and the politics of SWFs risks missing a bigger policy issue: the recent rapid growth in SWFs reflects large and persistent global imbalances which are a continuing threat to the stability of the world financial system and the global economy. Global imbalances and financial crises While there are many examples of countries which have run deficits for many years such as Australia and New Zealand, history also shows how painful the eventual adjustment can be. There are many examples in which capital flight has resulted in a huge fall in GDP growth and broader financial crises – for example in Latin America in the early 1980s, in the Nordic countries in the early 1990s and the east Asian economies a decade ago – which, in turn, weakened global GDP growth or global financial institutions. Countries with large deficits are vulnerable to a rapid reversal of capital flows. If investors are no longer willing to finance the deficit, domestic spending will need to be cut relative to output through a combination of reducing spending and switching production to the tradable sector. A recent IMF study reviewed 42 episodes of large reductions in current account deficits in developed countries over the past 40 years.