In this article we will be looking into the ownership and origins of the world’s major central banks. After reading this information you will understand the ownership structure of central banks.
You will also understand how central banks operate and how you can use that knowledge to trade Forex.
We will cover the following three topics in detail throughout this post:
- Some popular conspiracy theories surrounding central bank ownership
- The origins of central banking
- The modern ownership structure of the eight major central banks
Central banks are important within the interlinked global economies of the world. They are responsible for ensuring that prices are stable.
Some believe that a small concentration of powerful people own the central banks.
This ownership allows those people to dictate how society functions and influence governments.
To understand this we need to look back to the very origins of central banks and how they came into existence.
Central Bank Origins
According to the journal of economics, the first central bank was the Riksbank of Sweden. In 1668 it replaced the other largest private bank in Sweden.
That previous bank became insolvent after a financial crisis. Along with being the oldest central bank it is also regarded as being one of the most innovative.
The Financial Times notes, that it led the world to introduce negative interest rates in 2009. It was also the first bank to pioneer the introduction of an official digital currency.
The purpose of the bank was to provide stable lending to the Swedish economy. It didn’t actually become a functioning central bank until 1897, some 229 years after its start.
The bank has since had exclusive legal authority to issue bank notes for the entire country.
Emergence Of Modern Day Themes
The template for modern central banks emerged in London, England. Almost 2000 miles away from Sweden.
The Bank of England was established in 1694 by King William the third. William was the ruler of both Britain and the Netherlands at the time.
The bank originated to promote financial stability within the United Kingdom and began as a private company.
It would also act as the banker to the Government and its first role was to help the UK fund its war against France. It raised over £1.2 million in the first 12 days of its existence.
This central bank structure gave credibility to governments that needed to borrow money. This was also the beginning of another modern trend which we know today as the national debt.
Investors would lend money to the government and receive an 8% return on their investment. They also enjoyed favourable perks such as the right to issue bank notes.
The new system transformed the economy in Britain. This helped Britain to build the navy it used to dominate the globe for the following 200 years.
The bank was so profitable that even opponents of Britain remained shareholders. During the American war of independence George Washington was one such example.
In 1856 the BOE acted as the lender of last resort for the first time in history during a market panic.
The bank functions according to the determination of Government and legislation. This is despite its private ownership origins.
The bank was nationalised in 1946 and brought into full Government ownership. The world noticed the success of this central bank template and founded their own.
Within a few years most countries had their own Central Banks acting as the main lender.
The Evolution Of modern Day Central Banks
These origins are very often one of the causes for the confusion around who owns central banks and what they do.
Today, all major central banks operate independently of the governments that control them. This means that they are free to act as they see fit away from short term politics.
These powers came about through post war exchange rate agreements that failed.
The biggest collapse was that of the Bretton Woods Agreement in 1971. Governments around the world decided to allow their currencies to float instead.
By the 1990’s every major country decided to follow this model and give autonomy to their central bank.
The main role of all banks is to maintain price stability within the economy that they operate in. There are eight main banks that hold most influence over the global economy.
The most influential is the Federal Reserve in the US which was founded in 1913. The Fed’s influence exists because most global currency transactions involve the US Dollar.
According to the bank of international settlements it accounts for 85% of transactions. The other seven major banks include the ECB, BOE, SNB, BOC, BOJ, RBNZ and the RBA.
Some of these banks are still privately owned in some ways. The structure of ownership is very different today than it was in the beginning.
For example, the Bank of Japan and the Swiss National Bank are both listed on exchanges. This means that you can buy shares in them.
The Federal Reserve is also part owned by the commercial banks that make up its body. The details behind these banks can often help to clear any confusion this may cause.
Modern Day Central Bank Ownership
Most central banks are government owned but act autonomously based on their mandate.
The very first central banks private profit making companies. Some major central banks today still have elements of private ownership.
This causes confusion and has led to some creative conspiracy theories emerging.
One of these theories centres on the Federal Reserve and the nature of its ownership. It is true that the Federal Reserve does have a unique structure.
This is because it consists of 12 independent reserve banks that represent areas in the US.
Each of these 12 banks operates independently and has its own board of directors. This gives them a very similar structure to a private corporation.
Commercial banks that operate within the system also own shares in these 12 area banks.
In a traditional private company this would mean profit share and voting rights. In the Fed system neither of these things occur.
All 12 reserve banks transfer their net earnings to the US treasury each year, by law.
An independent central governing board – known as the Federal Reserve Board of Governors – monitors these 12 banks.
The board is also an agency of the US government appointed by the President and the senate. This creates a blend that appears to be private ownership but in practice is quite different.
Central Banks Listed On Exchanges
There are only two other major central banks in the world with elements of private ownership. These are the Bank of Japan and the Swiss National Bank.
As with the Fed system, the ownership of BoJ shares comes with caveats and restrictions. The government owns 55 percent of the central bank with the rest owned by private investors.
Private investors are not permitted to take part in the management of the bank in any form.
Should a bank fail, private investors do not receive distributions.
The limit on dividend payments is 5 percent of paid up capital. Allowable dividend payments are also negligible with the cap sitting at $20,000 USD.
In 2016 the market cap of the BoJ was at around $350 million USD. Daily volume of share trading is low at 1000 shares.
All these facts make an investment into the BoJ quite unattractive. Investments into traditional companies and assets yield better returns and more control.
The Swiss National Bank is the most unusual central bank when it comes to private ownership.
Swiss public bodies hold 61 percent of the shares. Individuals, investors and other banks own the rest.
The government appoint its board members and retail investors have no voting rights.
A private individual called Theo Siegert is the third largest shareholder. This is unique in central bank terms and he owns a 5% shareholding.
The main attraction for investors is the guaranteed dividend payment each year of 1.5%. But with limited voting rights the rewards remain negligible.
All the banks with private ownership models maintain autonomy and restrict shareholder influence.
The Central Bank Ownership Conspiracy
The most popular conspiracy theory asserts that central banks are private companies. These companies then profit from society and operate with an agenda of control.
We know that the reason these ideas spread is down to the historical origins of the world’s first central banks. These were indeed private institutions set up to profit from government lending.
Three of the world’s major central banks today maintain elements of private ownership. This adds to people’s confusion.
In reality, shareholders do not influence these banks in any way. They do not receive a share of the profits or have any role in management. The government appoints all governing members of each bank.
Over time the banks have evolved into the institutions they are today. Their sole purpose is to benefit the economy as a whole rather than a selected few.
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