While plenty is written about the central banks as bank supervisors or macro-prudential regulators, virtually nothing is written about central banks as investors.  Why?  After all, it is as an investor that central banks shape the global financial markets.

For example, consider for a moment QE (quantitative easing).  By purchasing securities, central banks deliberately changed the composition of securities available for private investors to acquire.

Or consider for a moment central bankers acting as a lender of last resort.  As former Fed Chairman Paul Volcker succinctly put it:  central banks need to know what the collateral is worth because they are likely to end up owning it.

However, during the acute phase of the Great Financial Crisis in 2008, central bankers were willing to accept dodgy assets for which nobody could determine a value as collateral.

Do taxpayers want central banks to be able to put their money at risk this way?

No!  This is particularly true because putting taxpayer money at risk either buying opaque securities or lending against opaque assets isn’t necessary.

Central banks should be restricted to only purchasing or lending against transparent assets where an investor could know what they own.  This restriction on central banks would shape the financial markets as the markets would respond by generating these types of qualifying assets.

This is a very important point.

Central banks have the ability to restore transparency across the opaque parts of the global financial system by their refusal to accept opaque assets.

Of course, central banks, Wall Street and the rating firms should not determine if an asset is transparent and thus qualifies for purchase or use as collateral.  Each of these entities has a significant conflict of interest in making this determination.  Central banks have already shown a willingness to accept dodgy opaque securities as collateral when facing financial turmoil.  Wall Street prefers to sell high margin opaque securities.  Rating firms have already shown they will slap a rating on any security for a fee.

Instead, central banks should join with investors as clients of the Transparency Label Initiative.  It is only this Initiative that is free from the conflicts of interest that central banks, Wall Street and the rating firms have in determining if an asset is transparent.

By becoming a client of the Initiative, central banks would further shape the global financial system.