More than three years ago, Fed watchers were stunned when none other than Ben Bernanke's former special advisor, Andrew Levin, said that "a lot of people would be stunned to know” the extent to which the Federal Reserve is privately owned, stating next that the Fed "should be a fully public institution just like every other central bank."
But is that true? Are all other central banks "fully public"? For the answer we go to a recent post from The BOE's Banker Underground blog which looks at the question of who really owns central banks. Here is what it found.
by David Bholat and Karla Martinez Gutierrez
Around the world, central banks have a number of different ownership structures. At one end of the spectrum are central banks, like the Bank of England, that are wholly owned by the public sector. At the other end are central banks, like the Banca d’Italia, whose shareholders are wholly private sector entities. And there are central banks, like the Bank of Japan, that lie in-between. But do these differences matter?
In this blog post, we explore the variety of central bank ownership structures, both historically and globally. We also suggest areas for future research on the topic.
The separation of central bank ownership and control
Ownership is a complex concept, a bundle of rights and responsibilities. In ordinary language, if I say I own a bike, then this implies I possess the bike and can use it as I please. Ownership implies control.
However, as Thorstein Veblen, Adolf Berle and Gardiner Means first observed, control is sometimes unbundled from ownership in modern corporations. The owners of corporations (shareholders) are usually abstracted from their day-to-day operations. Instead, control of corporate resources is ordinarily exercised by its management. Therefore, to say that I own shares in a corporation has a much narrower meaning than when I say I own a bike. In the case of a corporation, I am mainly saying that I have a financial interest in the business, specifically, that I am a residual claimant on the corporation’s profits after all other claimants such as employees, creditors and the government (taxes) have been paid.
Veblen, Berle, and Means developed their ideas with for-profit private sector corporations in mind. Yet, the distinction they drew between ownership and control is surprisingly applicable to most modern central banks. The owners of central banks, mostly governments, are ordinarily responsible for making executive appointments, and receive a share of central banks’ profits. Day-to-day control of the central bank is delegated to the central bank’s senior management and policy committees.
While both modern central banks and modern corporations are often characterised by a separation between ownership and control, there are key differences in their organisational objectives. The purpose of most private sector corporations is the pursuit of profits for shareholders. By contrast, central banks typically have statutory mandates based on economy-wide goals – e.g. price stability, financial stability and market functioning. This is irrespective of whether central banks are wholly owned by government, or, as in a handful of cases detailed below, their residual claimants are private sector entities.
Consequently, the issue of central bank ownership is considered by most scholars of marginal importance. Yet the issue of central bank ownership is a salient topic to revisit at present when the constitutional basis of central banks is receiving renewed attention (Goodhart and Lastra 2017; Tucker 2018). In what follows, we offer a survey of the variety of central bank ownership structures historically and globally.
The nationalisation of central banking
In the early twentieth century, there was a roughly even mix of central banks with private sector and public sector shareholders (Figure 1). That changed mid-century. Some established central banks, like the Bank of England, were nationalised (Figure 2). At the same time, almost all of the central banks created in post-colonial states were established fully state-owned. By the end of the century, just a handful of central banks with private sector shareholders remained.
Figure 1: Ownership model of central banks globally over time, 1900 to the present
Figure 2: List of nationalised central banks globally in order of year nationalised
While state-owned central banks now predominate, some central banks still have forms of private sector shareholding. These include central banks in the United States, Japan and Switzerland. Figure 3 classifies these central banks according to whether they are owned by government, private sector banks, other private sector shareholders, or some combination of these. ‘Other private sector shareholders’ means individuals and/or non-bank private sector institutions. The European Central Bank (ECB) represents a fourth ownership model not adequately captured by Figure 3, as it is established by treaty among EU member states. Besides the ECB, other supra-national central banks include the Eastern Caribbean Central Bank, the Bank of Central African States and the Central Bank of West African States.
Figure 3: Classification of central banks by ownership
Figure 4 provides more detailed information on central banks not fully owned by governments. Ownership models vary considerably among these nine central banks. Although the central banks of Japan, San Marino, and Turkey have some private sector shareholders, the majority shareholder is still the state. In Belgium and Switzerland, around half of the shares are held by the government. By contrast, the American, Italian, and South African governments have no formal ownership stake in their central banks. The Bank of Greece presents a more mixed model, although it is worth bearing in mind that it, along with the Belgian and Italian central banks, are members of the Eurosystem.
Figure 4: Institutional detail on central banks not fully owned by governments
Figure 4 also shows heterogeneity among these central banks in how they remunerate their private sector shareholders. In some cases, like the US Federal Reserve, the amount paid to shareholders is fixed such that the dividend closely resembles a coupon payment on a bond. In other cases, as in Turkey, the remuneration is variable and discretionary, although even here it is capped. A recent paper finds that central banks with private sector shareholders do not differ from central banks with only public sector shareholders either in their profitability or in the share of profits they distribute to shareholders.
A forward-looking research agenda
This blog has provided a primer on central bank ownership. Occasionally, some people argue central banks should be fully privatised, with the largest private sector banks playing the role of lenders of last resort. Conversely, some argue central banks should be fully nationalised. However, central bank ownership on its own may not matter. Instead, the crucial factors may be other aspects of their governance, especially their mission statements. Today, all central banks, whether wholly owned by government or with shares held by private sector entities, have mandates based on economy-wide outcomes. A truly private sector central bank without implicit or explicit government guarantees, and which singularly pursued profits for its shareholders, would likely behave differently from current central banks, which take their objective to be the promotion of the public good.
Even so, we think the issue of central bank ownership is worth greater scholarly inquiry than has been the case to date. We conclude by suggesting two areas for future research. 1. The shares of central banks in Belgium, Greece, Japan, and Switzerland are publicly traded on stock exchanges. It would be interesting to understand the informational content conveyed by these share prices, in particular, the extent to which these central banks’ share prices lead or lag other macroeconomic variables such as GDP or wider stock market indices. For instance, Figure 5 shows that the National Bank of Belgium’s share price closely tracks the benchmark index (BEL 20) of the Euronext Brussels stock exchange on which it trades.
Figure 5: Year-on-year changes in the value of the National Bank of Belgium’s stock and the BEL 20 stock market index (r = .706)
2. In other industries, it is sometimes argued that private sector ownership or public sector ownership full stopimprove an organisation’s ability to achieve its objectives. These general theoretical arguments could be subjected to empirical scrutiny in the specific case of central banks. Although different central banks have different objectives, two of the most common are promotion of monetary and financial stability. Monetary stability can be defined as low inflation, while financial stability can be defined by the absence of financial crises. Researchers could study whether there is any correlation between central bank ownership structure and these macroeconomic outcomes. For example, Figure 6 plots the number of years that OECD and G20 countries have experienced financial crises between 1970 and 2017. Countries are split between those with fully state-owned central banks, and those that have central banks with some form of private sector shareholding. The median value (8 years in a financial crisis) is the same for both countries with fully-state owned central banks, and those that have central banks with some form of private sector shareholding over this time period. There is thus no clear association between financial stability and central bank ownership structure, although we would like to see deeper empirical work to draw firmer conclusions.
Figure 6: Number of years between 1970 and 2017 that OECD and G20 countries experienced a financial crisis, as defined by the sources below, split by central bank ownership type
Note: The data includes all central banks with private sector shareholders globally, with the exception of San Marino. Saudi Arabia (a G20 country) is excluded from the analysis because no information was available. The Austrian central bank is classified as a central bank with private sector shareholders until 2009, after which it is classified a publicly owned central bank because it was nationalised.