John Gieve: Sovereign wealth funds and global imbalances Speech by Sir John Gieve, Deputy Governor of the Bank of England, to the Sovereign Wealth Management Conference, London, 14 March 2008. * * * Introduction Much of the debate on sovereign wealth funds (SWFs) has focused on political questions: do they reintroduce the failings of public ownership into market economies by the back door, will SWFs use their ownership rights to pursue political ends, and will resistance to foreign ownership lead to a new wave of protectionism. I want to concentrate today on some economic issues: why have they become so prominent recently, how does that relate to imbalances in the world economy, how are they affecting financial markets and what are the policy implications of their growth. Background But first let me set out some of the background. There is no off the shelf definition of an SWF. What I have in mind is a government investment vehicle that manages foreign assets with a higher risk tolerance and higher expected returns than for central bank foreign currency reserves. 1 The size of such funds is hard to measure, but may be in the $ trillion range. Origins of SWFs Investments by SWFs are one type of capital flow between countries so they have always been closely related to global imbalances in trade. When countries run surpluses on their current account, they generate equal and opposite net capital outflows of one sort or another and those capital flows produce an investment income.
If the Riksbank launches an e-krona with a positive interest rate, it can in some situations be very attractive for both the general public and companies to convert their account balances in the banks to e-krona with the Riksbank. The banking system could then be drained of the funding for its lending, and become unstable, which could damage the supply of credit in the economy. In addition to the questions I have just mentioned, there are a number of other questions, such as technological solutions, consumer integrity and how a solution can be adapted to suite different groups in society. As you hear, I have only been able to take up a lot of questions here. I don't have all the answers. And I don’t think anyone else has at present. The only thing we can be fairly certain of is that whatever direction the Riksbank chooses to take - whether or not to issue e-krona - it can have a major impact on the payment market, the banks’ business models, the way interest rate setting functions, financial stability, and so on. The Riksbank will investigate e-krona Now I have given my view on the situation for Sweden as one of the countries where the use of cash is declining the most and the fastest and where the general public are finding it increasingly difficult to get access to central bank money.