What happens when a central bank splits in two?

Say the San Francisco Fed decided to secede from the Federal Reserve System or the Bank of Greece started to print its own euro notes without the consent of the Eurosystem. What happens to a nation's currency when the central bank is split into parts? There is a possibility we might be seeing such a situation developing in Libya with the emergence of two different Libyan dinars.

Libya's political scene is ridiculously complicated so I'll paint the picture in broad brush strokes. The Central Bank of Libya has several offices, the two relevant ones being the western one in Tripoli and the eastern one in Bayda. Prior to the Arab spring, each area was under the control of the Gaddafi government but both have since come under the control of competing regimes. Tripoli is run by the U.S.-backed Government of National Accord (GNA) while Bayda is under the control of the Tobruk-based House of Representatives.

As I understand it, over the last few years of strife the two offices have usually been able to work together despite being under different regimes.Yesterday, however, the Bayda branch announced that it would be putting new 20 and 50 dinar denomination notes into circulation. Both the Tripoli government and their U.S. backers quickly declared that the new issue was illegitimate. The U.S. Embassy's statement on Facebook said that "the United States concurs with the Presidency Council's view that such banknotes would be counterfeit and could undermine confidence in Libya's currency and the CBL's ability to manage monetary policy to enable economic recovery."

This brings up an interesting conundrum. Say the Bayda branch of the Central Bank of Libya starts to spend the new 'counterfeit' dinars and the U.S.-backed Tripoli branch refuses to recognize them. Will the public accept the new issue of Bayda dinars, and if so, at what rate will the notes trade relative to Tripoli's notes? Could Libya end up with two different dinar currencies?

Were the two note issues identical, it would be impossible for Libyans to discriminate between them. They'd happily accept the new notes and all dinars would continue to be fungible. But this doesn't seem to be the case. Unlike Libya's legacy note issue, which was printed by De La Rue in the U.K., the Bayda branch's new dinars are printed by Goznak in Russia. Apparently Goznak has used different watermarks and a horizontal serial number rather than a vertical one. Most importantly, the new notes bear the signature of the head of the Bayda office while the old notes have the Tripoli branch's chief on them.

If it does not recognize Bayda's 'counterfeit' notes as its liability, the Tripoli branch voids its responsibility to buy them back in order to maintain their value, effectively walling off its resources from the Bayda branch. These resources include any foreign reserves it might have, U.S. financial backing, and financial support from the local regime. And without any guarantee that those notes will have a positive value, the public—which can easily differentiate between the two bits of paper—may simply refuse to accept Bayda dinars at the outset when the Bayda branch tries to spend them into circulation. Long live the Tripoli dinar.

The Bayda branch might try to promote the introduction of Baydar dinars by pegging them at a 1:1 rate to existing Tripoli dinars. This is how the euro, for instance, was kickstarted. But that peg will be tested. Libyans will bring Bayda dinars to the Bayda branch to exchange for Tripoli dinars. If the branch runs out of Tripoli banknotes, it will have to buy more of them in the open market to maintain the peg, but with what? If it lacks the resources to buy them, the peg will be lost and Bayda dinars will fall to zero, or to a very large discount.

But the Bayda branch isn't without its own resources. First, it has the financial support of the local regime. Furthermore, according to this surreal article there is a vault in Bayda that contains 300,000 gold and silver sovereigns minted in honour of the late Colonel Gaddafi, worth nearly £125 million. The Bayda branch doesn't know the combination and Tripoli refuses to provide it. If the safecrackers that the Bayda branch has hired are able to get in, that amount will provide it with enough firepower to buy back Bayda dinars and help support the peg. In which case the two notes would circulate concurrently and be fungible.

If two dinars emerge, which central bank would control monetary policy? That depends on which brand of dinar Libyans choose to express prices and debts. As long as the existing Tripoli dinar is the medium of account—the physical object that people use as the definition of the dinar unit ل.د.—then any policy change adopted by Tripoli's central bankers will be transmitted to the entire Libyan price level, both the east and west. Usage of Tripoli dinars rather than Bayda dollars for pricing is likely to prevail for the same reason we all use QWERTY keyboards when better alternatives exist, force of habit is difficult to overcome. Even if Bayda dollars do emerge as a medium of account, as long as they are pegged to the Tripoli dollar, then Tripoli still gets to call the shots.

The situation isn't resolved yet—the Tripoli branch could very well accept Bayda dinars as its liability, thus defusing the situation. In any case, it will be interesting to follow. Incidentally, Libya's situation reminds me of one of the ideas put forth during the 2015 Greek crisis; a secession of the Bank of Greece from the Eurosystem so that Greeks could print their own type of euro. If Greece boils over again and the separation idea pops up, Libya may serve as a reference point.

Greece and IMF SDRs—Gold Next?

The FT makes a hullabaloo out of Greece using special drawing rights (SDR) to pay the IMF earlier this week, referring to the step as "unusual." Zero Hedge predictably grabs the baton and runs as far as it can go with the story.

It's a good opportunity to revisit the SDR, a topic I last wrote about back in 2013.

The FT claims that the payment of SDRs to the IMF is "the equivalent of taking out a low-interest loan from the fund to pay off another." Here the FT has committed cardinal error #1 when it comes to understanding how SDRs work—SDRs are not lent out by the IMF.

I like to think of the SDR mechanism as comprised of 188 lines of credit issued to each of the IMF's 188 members. These lines of credit are denominated in SDR and apportioned according to each countries' relative economic size. Any line of credit needs a creditor. In the case of SDRs, who fills this role? Why, the 188 members of the IMF do. The SDR system is a mutual credit system, or what I referred to in my older post as the world's largest Local Exchange Trading System, or LETS. Where does the IMF stand in all this? It is simply an administrator of the system. So by paying the IMF in SDRs, the Greek government isn't taking out a low-interest loan from the IMF—rather, it's drawing down on the credit provided to it by 187 other countries. As for the IMF, it isn't getting another Greek-issued debt instrument. Rather, it is getting a mutual liability of 188 nations.

The second sin in the FT's article is the assumption that SDRs are "rarely tapped" and that therefore, Greece is doing something unusual in "raiding" its SDR account. As a quick glance to the data shows, that's simply not the case. The chart below (apologies for its extreme height, but it's the only way I can visualize the data) shows that over time,  countries have tended to spend down their SDR lines of credit. Any nation to the left of the 100% line (and illustrated in light blue) has drawn down on their credit line while those to the right (illustrated in darker blue) have accumulated SDR surpluses. Most countries lie to the left of the line. Greece, which after this week's transaction has just 5% of its total line of credit undrawn*, joins Macedonia, Iceland, Hungary, Serbia, Ukraine, and Romania near the low end of the range, many of whom drew down their balances to deal with the after-effects of the credit crisis.

Data Source

Nor is the FT article right in implying that it is unusual for countries to pay the IMF in SDRs. Consider that since the SDR's inception in 1969, 204 billion SDRs have been issued to 188 member nations. Logic tells us that each of these 204 billion SDRs must be owned by some combination of member nations, right? Not quite. The 188 nations collectively own only 189 billion SDRs. Who holds the missing 15 billion SDRs? Fifteen institutions, or proscribed holders, have been granted the ability to buy and sell SDRs in the secondary market, including the Arab Monetary Fund, the Bank for International Settlements, and the European Central Bank. Together they own about 1.2 billion SDRs. But the real sop here is the IMF itself, which owns around 13.5 billion SDRs. Because IMF members can use SDRs in transactions involving the IMF, namely the payment of interest on and repayment of loans (see here), the IMF has become the second largest owner of SDRs (after the U.S.).

So in general, the SDR mechanism has been characterized by steady drawdowns of SDR lines of credit by member nations, with surpluses accumulating to the IMF. Far from being unusual, Greece's decision to pay the IMF in SDRs is pretty much par for the course.

One thing I find interesting is that the SDRs that Greece used to pay the IMF are the property of the Bank of Greece, Greece's central bank, and not the Greek government (see here). This means that BoG Governor Yannis Stournaras had to willingly open his pockets to the Greek government to facilitate the IMF payment. In doing so, the central bank has accepted a Greek government-issued liability to pay back SDRs rather than the actual SDRs. As a claim on 187 nations, the latter is surely preferable to the former, which is a claim on a failing nation.

So what about the BoG's other larger unencumbered asset, its gold? According to its most recent balance sheet, the Bank of Greece now owns €5.4 billion of the yellow metal, or 3.62 million ounces. For more on Greece's gold, Ronan Manly has the details. Having just given up his SDRs, would Stournaras be willing to render this gold up to the Greek state in return for a gold-denominated IOU with finance minister Yanis Varoufakis's signature on it? If so, the Greek government could sell this gold on the market for euros to pay the IMF. Settling scheduled June and July payments would be a breeze. This would no doubt be a stain on the BoG's independence, but with the Eurogroup turning the screws, all chips may be in play.



*I'm assuming that Greece paid 517 million SDRs to the IMF, worth 650 million euros at current SDR-to-euro exchange rates.

Plumbing the depths of the effective lower bound

Unfathomable Depths by Ibai Acevedo

Denmark's Nationalbank and the Swiss National Bank are the world's most interesting central banks right now. As the two of them push their deposit rates to record low levels of -0.75%, they're testing the market's limit for bearing negative nominal interest rates. The ECB takes second prize as it has been maintaining a -0.2% deposit rate since September 2014.

At some point, investors will flee deposits into 0%-yielding cash. This marks the effective lower bound to rates. Has mass paper storage begun? The last time I ran through the data was in my monetary canaries post, which was inconclusive. Let's take a quick glance at the updated data.

To gauge where we are relative to the effective lower bound, I'm most interested in the demand for large denomination notes, which bear the lowest costs of storage. Once a central bank reduces its deposit rate so deep into negative territory that the carrying cost of deposits exceeds the cost of storing a nation's largest value banknote, then it has hit the effective lower bound. Small denominations notes, which have higher storage costs, are not a pivotal part of the picture given the ability of note holders to freely convert low value notes into higher ones.

European Central Bank

The ECB issues the €500 note, which has the second highest purchasing power out of the world's currency notes. I've charted the quantity of €500 euro notes in circulation below, as well as the percent change in the value of all euro denominations:

After declining through 2012 and 2013, we saw a sharp rise in demand for €500 notes, particularly in December 2014 and the first few months of 2015. The red line illustrates the general demand for all denominations of euro cash. Over the last four months the seasonally-adjusted growth rate of banknotes outstanding has risen to its highest level in the last five years.

It's hard to determine how much of this increase can be attributed to the ECB's negative rate policy, initiated when Mario Draghi brought the deposit facility rate to -0.1% in June and -0.2% in September, and how much is due to the Greek fiasco. Growing fears that Greece will either leave the euro or impose capital controls have led to a steady jog out Greek banks. There are two escape routes: Greek's can convert their deposits can into German deposits or into cash.

In an interesting article, Bloomberg's Lorcan Roche Kelly backs out the Greek-specific demand for European cash. Read it for the full details, but the shorter rendition is that a line item on the Bank of Greece's balance sheet allows us to see how many banknotes Greeks are demanding in excess of the Bank of Greece's regular allocation. Kelly finds a large spike beginning in December and extending into 2015, which we can attribute to the bank jog. I've recreated the chart below:

Source: Bloomberg, data to end of March

The approximately €12 billion jump in Greek cash demand corresponds nicely with the recent €7.2 billion spike in €500 notes in circulation across the entire eurozone. The upshot is that a large chunk of the rise in €500 notes over the last few months is probably due to a run on Greek banks, not an escape from negative-yielding ECB deposits. Remove the run and the rise in demand for €500 notes would have been unremarkable, indicating that the eurozone is still far from hitting the effective lower bound.

Swiss National Bank

Because Swiss banknotes are not a direct escape route from the ongoing Greek bank run, SNB cash data should provide a clearer signal of the whereabouts of the effective lower bound than ECB data. The SNB issues the world's most valuable banknote in terms of purchasing power; the 1000 franc note. Below I've plotted the yearly percent change in demand for both the 1000 note and Swiss cash-in-general to the end of February.

There's been slight pickup in the demand for Swiss cash, but nothing dramatic. Its worth pointing out that Swiss paper currency has historically played a safe haven role. Demand tends to spike during episodes of uncertainty, including the 2008 credit crisis and the 2011-12 period, when it seemed like the euro could be torn apart. This means that it is difficult to be sure how much of the recent pickup in demand for Swiss cash stems from the SNB's -0.75% deposit rate and how much is due to fear of a Greek government default, which would create havoc in world markets.  

Danmarks Nationalbank

Our final canary is the Danmarks Nationalbank. Unlike the demand for Swiss paper francs, the demand for Danish paper krone does not usually spike during times of crisis. For instance, during the 2008 credit crisis demand remained muted. This leads me to believe that demand for paper krone provides the clearest indicator yet of the presence (or not) of the effective lower bound. I've charted the year-over-year change in Danish currency in circulation.

In the 55 days that have passed since the Danmarks National bank reduced its rates to -0.75% (February 5), there has been a sustained rise in the demand for cash, as the red data indicate. But I don't think we can describe it as anything out of the ordinary, at least not yet.

Interestingly, in late March the Nationalbank granted Danish banks some wiggle room by providing them with greater access to the Bank's 0% current-account facility. This small adjustment would have reduced Danish banks' incentives to emigrate from -0.75% deposits into cash. Was the central bank's decision to provide this wiggle room a response to private data showing that it had hit the effective lower bound? Who knows.

It may be worth noting even if a central bank finds itself at the effective lower bound, it can forestall the demand for large denomination notes by using moral suasion. Willem Buiter mentions this possibility in his recent note High Time To Get Low, but maintains we have no evidence of this sort of pressure. I'm tempted to agree with him. If either the Danish or Swiss central bankers have put informal embargoes on cash, we would have known about it by now.

The use of moral suasion to prevent large denomination banknote storage would effectively freeze the quantity of high value notes in circulation. In such a scenario, we'd expect the 1000 Sfr note to rise to a slight premium to face value, say 1050 Sfr in bank deposits for each 1000 Sfr in banknotes. Traders would be willing to pay this premium as long as the storage costs on high value notes are lower than the -0.75% penalty set by the SNB on deposits, thus allowing them to earn an excess return on their note holdings. As long as moral suasion remains successful in choking off Swiss banks' demand for cash, each subsequent cut by the SNB into ever deeper negative territory would drive the premium on notes higher. (Assiduous readers will recognize this as the second of three ways for a lazy central banker to escape a liquidity trap.)

In sum, we probably haven't hit the effective lower bound yet. Stay tuned.

Grexit: An Escape to More of the Same

The upcoming Greek election has renewed interest in the idea of Grexit. This option is often presented to the Greek public as desirable given that it would restore an independent monetary policy to the nation.

Beware, this is dangerous advice. The euro isn't a glove that you can take on and off, it's a Chinese finger trap; once in, it's tricky to get out. Even if Greece were to formally leave the euro, odds are that it would remain unofficially euroized, leaving it just as bereft of an independent monetary policy as before. The real trade off in a Grexit-or-not scenario is between formal membership in the euro with some say in monetary policy, no matter how small, or informal membership without any say whatsoever.

The optimists, say someone like Hans-Werner Sinn, advise the Greeks to leave the euro and adopt a new currency. The value of this new drachma would immediately collapse. As long as prices in Greece are somewhat sticky, Greek goods & services will become incredibly competitive on world markets, spawning an export/tourism-led recovery. By staying on the euro, however, Greece forfeits the exchange rate route to recovery. Instead, Greece's competitiveness can only be restored via a painful internal devaluation as wages and prices adjust downwards.

While the optimists tell a good story, they blithely assume a smooth switch from the euro to the drachma. Let's run through the many difficult steps involved in de-euroization on the way to an independent monetary policy. All euro bank deposits held at Greek banks must be forcibly converted into drachma deposits, and speedily enough that a bank run is preempted as Greeks desperately try to evade the corral by moving euros to Germany. At the same time, the Bank of Greece, the nation's central bank, needs to issue new drachma bank notes, the public being induced to use these drachmas as a medium of exchange.

Now even if Greece somehow pulls these two stunts off (I'm not convinced that it can), it still hasn't guaranteed itself an independent monetary policy. To do so, the drachma ₯ must also be adopted as the unit of account by the Greek public. Not only must financial markets like the Athens Stock Exchange begin to publish stock prices in drachmas, but supermarkets must be cajoled into expressing drachma sticker prices, employees and employers need to set labour contracts in terms of drachmas, and car dealership & real estate prices need to undergo drachma-fication.

Consider what happens if drachmas begin to ciruclate as a medium of exchange but the euro remains the Greek economy's preferred accounting unit. No matter how low the drachma exchange rate goes, there can be no drachma-induced improvement in competitiveness. After all, if olive oil producers accept payment in drachmas but continue to price their goods in euros, then a lower drachma will have no effect on Greek olive oil prices, the competitiveness of Greek oil vis-à-vis , say, Turkish oil, remaining unchanged. If a Greek computer programmer continues to price their services in euros, the number of drachmas required to hire him or her will have skyrocketed, but the programmer's euro price will have remained on par with a Finnish programmer's wage.

As long as a significant portion of Greek prices are expressed in euros, Greece's monetary policy will continue to be decided in Frankfurt, not Athens. Should the ECB decide to tighten by lowering interest rates, then Greek prices will endure a painful internal deflation, despite the fact that Greece itself has formally exited the Euro and floated a new drachma.

We know that a unit of account switch (not to mention successful introduction of drachma banknotes) will be hard for Greece to pull off by looking at dollarized countries in Latin America. To cope with high inflation in the 1960s and 70s, the Latin American public informally adopted the U.S. dollar as an alternative store of value, medium of exchange, and unit of account. Even after these nations' central banks had succeeded in stabilizing their own currencies, however, dollarization proved oddly persistent. This is referred to as hysteresis in the economics literature. Economists studying dollarization suggest that network externalities are the main reason for hysteresis. When a large number of people have adopted a certain standard there are significant costs involved in switching over to a competing standard. The presence of strong memories of past inflation may also explain dollar persistence.

In trying to de-euroize, Greece would find itself in the exact same shoes as Latin American countries trying to de-dollarize. Greeks have been using the euro for 15 years now to price goods; how likely are they to rapidly switch to drachmas, especially in light of the terrible performance of the drachma relative to other currencies through most of its history? Those few Latin American countries that have successfully overcome hysteresis required years, not weeks. If Greece leaves the euro now, it could take decades for it to gain its own monetary policy.

As an alternative illustration of the power of network externalities, consider the multi-year plans made by Slovakia (pdf, fig 2) prior to switching over to the euro, or the Czech Republic's timeline when it makes the changeover. Each step must be broadly communicated and telegraphed long ahead of time so as to ensure that all members of a nation are properly coordinated, thus ensuring the network effects engendered by the incumbent currency can be overcome. These euro changeover plans weren't adopted a few days before the switch, but often as much as a decade before.

In sum, I fail to understand how Greece can ever expect to enjoy the effects of a drachma-induced recovery if the odds of drachma-fication or so low, especially given the sudden nature of a Grexit. At least if it stays part of the euro, Greece has a say in how the ECB functions thanks to the Bank of Greece's position in the ECB Governing Council. And at least Greece's inflation rate and unemployment rate will be entered into the record as official data worth considering by ECB monetary policy makers. For just as the Federal Reserve doesn't consider Panamanian data when it sets monetary policy (Panama being a fully dollarized nation), neither would the ECB care about Greek data if Greece were to leave the euro, though still be euroized.

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Basil Halperin responds.

Central banks that trade on the stock market

Most people don't realize that the central banks of Belgium, Japan, Greece, Switzerland, and South Africa are all publicly-traded. In times past, central clearinghouses were typically privately-owned while the issuance of bank-notes was the domain of competing banks. The fact that a few central banks still retain traces of their former private nature is a good reminder that centralized banking isn't necessarily the domain of the public sector.

The Swiss National Bank, for instance, was founded in 1907 to take upon itself the issuance of national bank notes, hitherto provided by private banks. According to Hübscher and Kuhn (pdf), efforts to establish a wholly government-owned central bank were defeated in an 1897 national referendum. Opponents of the plan drew up an alternative proposal for a privately owned bank the structure of which would, according to Bordo, "not allow for state socialism or the public control of credit policy." One fifth of the new bank's capital would be given to the private banks to compensate them for the loss of their power to issue notes.

Nowadays, SNB shares trade on the SIX Swiss Exchange. The original 100,000 shares are still outstanding, with 2,185 private shareholders owning about 37% of the float. Another 53% is owned by the cantonal governments and cantonal banks and the last 10% by other public institutions. The Swiss Federal council (Switzerland's federal government) doesn't own a single share, a contrast to most central banks which are 100% owned by their federal government. The largest private investor is Theo Siegert, who owns 5.95% of the float. The SNB provides all breakdowns here.

Though the shareholders of the five central banks may to some extent "own" their nation's central bank, they don't exercise the same degree of control over their company that regular shareholders do. Here are some of the drawbacks to owning central bank shares:

1. Capped dividends: The SNB's dividend is capped at 6% of the company's paid-up share capital. Because the SNB was originally capitalized with CHF 25 million, a large amount a hundred years ago but today a minuscule slice, aggregate dividend payments to all shareholders are limited to a mere CHF 1.5 million a year (around US$1.6 million), or CHF 10.50 per share. At today's stock price of CHF 1115, the shares yield just 1% or so.

This is a stable dividend. The SNB has paid it going back to at least 1996 (the last annual report I could get my hands on). But unlike the typical common share, there is no chance of this dividend growing.

2. Profits siphoned away: Nor will the profits that are not distributed to shareholders stay with the Bank. The lion's share of the SNB's remaining profits go to the state. Specifically, two-thirds of earnings are paid to the cantonal governments, and another third to the Federal council. In 2011, for instance, the SNB earned CHF 4.9 billion. A tiny CHF 1.5 million sliver was paid to shareholders while the various governments received CHF 1 billion (the balance was held over as reserve for the next year).

Much like the SNB, the Bank of Japan (BOJ) pays a fixed dividend. The BOJ, established in 1882, trades on the JASDAQ for around ¥46,500 a share. The Bank is not permitted to pay more than 5% of its  ¥100 million in paid-up capital to shareholders. As is the case with the SNB, this was a large amount back in 1942, the last time the BoJ was capitalized, but today its amounts to just ~$10 million. The upshot is that the BOJ can only provide shareholders a piddling ¥5 million in aggregate dividends a year, or  ¥5 a share. This equates to just US$50,000 in aggregate dividend payments, or around 5 cents a share. Considering that total profits earned by the BOJ in 2011 amounted to  ¥503 billion (around $5 billion), the shareholders are getting peanuts.

3. Minority position: Unlike the SNB, the Japanese federal government owns 55% of the Bank's shares. This puts private shareholders at an even larger disadvantage since they must play second fiddle to a dominant shareholder at all shareholder meetings.

4. No residual claim: The Bank of Japan Act stipulates that should the Bank be dissolved, shareholders only get a return of initial paid-up capital. All residual assets belong to the national treasury. Thus shareholders get a mere  ¥100 million (around $1 million) back in case of dissolution, or around  ¥100 per share -- far less than the current  ¥46,500 a share. Genuine common shares would allow shareholders to get all residual assets.

According the the National Bank Act, SNB shareholders are also restricted in their ability to claim residual assets:

In case of a liquidation of the National Bank, the shareholders shall receive in cash the nominal value of their shares as well as reasonable interest for the period of time since the decision to liquidate the National Bank became effective. The shareholders shall not have any additional rights to the assets of the National Bank. Any remaining assets shall become the property of the new central bank.

This means that each SNB shareholder is entitled to CHF 250 a share upon dissolution, far less than the current CHF 1150 per share price.

4. Inability to select management. Even with their voting power, SNB shareholders have little influence over the composition of bank management. The supreme managing and executive body of the Bank is the three-member Governing Board. All three members are appointed by the Federal Council upon recommendation of the SNB's Bank Council. Here shareholders do exercise some power. They have the ability to vote 5 members of the Bank Council. But the remaining 6 are appointed by the Federal Council, which means that the Federal Council can always stack the deck to ensure that its people get appointed to the Governing Board.

In the BOJ's case, it appears that shareholders have no ability whatsoever to select BOJ officials.

5. Voting limitations: The SNB limits non-public shareholders to a maximum of 100 votes. Even though Theo Siegert owns 5,950 shares, he only gets 100 votes. Most common shares carry the privilege of one share, one vote.

The South African Reserve Bank (SARB) also imposes artificial limitations on shareholders. No single shareholder is allowed to hold more than 10,000 of the 2 million shares outstanding. This limits the ability of individuals shareholders or blocks of shareholders to exercise voting control, a key element of modern shareholder activism.

The SARB was established in 1921 and, much like the SNB, replaced the existing network of private bank-note issuers then operating in South Africa. Its shares currently trade for about R7.00 on a SARB-hosted OTC market rather than the local Johannesburg Stock Exchange from which the shares were delisted a few years ago. The market is thin, although according to the bank's records there are over 600 shareholders. Like the SNB, the federal government does not own a single share of the Bank.

Similar to the SNB and BOJ, the SARB can only pay a fixed dividend of 10% on paid-up capital. With just R2 million in paid-up capital outstanding (about $225,000), the Bank only distributes R200,000 a year, or R0.10 a share. Compared to the R53 million in central bank profits paid to the government in 2011, shareholders get next to nothing.

Because the return on all three central bank shares so far discussed is calculated on a nominally fixed amount of paid-up capital from a bygone era when a few million dollars was still a large amount of money, they trade more like perpetual bonds than stocks. But this isn't the case for our fourth publicly-traded central bank -- the Bank of Greece (BoG). In 1927, the private National Bank of Greece waived its right to issue bank-notes in return for handling the IPO of the new Greek central bank. The BoG currently has some 19,000 shareholders and trades on the Athens Exchange for around €16.

What makes the Bank of Greece unique is that it pays a fixed 12% dividend on paid-up capital and an additional dividend based on remaining profits. Whereas the first payment is fixed relative to paid-up capital, the second is floating, thereby allowing shareholders to get exposure to continued growth in the Bank's business. The floating dividend also exposes shareholders to declines in the Bank's business, which is what has happened over the last few years:

Due to the euro crisis, the floating portion of the dividend has collapsed from over €40 million to zero. The upshot is that BoG shares are much more volatile than the shares of their fixed-rate cousins the BOJ, SNB, and SARB. Below is the share price of the BoG, which seems to trade much like a regular bank common share:

The National Bank of Belgium (NBB) falls in the same mold as the BoG. The NBB was founded in 1850 as a limited liability company, with shares distributed to private banks who in exchange agreed to forgo the privilege of issuing bank-notes. The Belgian government subscribed to 50% of the shares in 1948. The Bank's constituting articles specify a minimum 6% dividend on paid-up capital and an additional dividend to be paid after the reserve fund has been topped up:

Article 32. - The annual profits shall be distributed as follows:
1. a first dividend of 6% of the capital shall be allocated to the shareholders;
2. from the excess, an amount proposed by the Board of Directors and established by the Council of Regency shall be  independently allocated to the reserve fund or to the available reserves; 
3. from the second excess, a second dividend, established by the Council of Regency, forming a minimum of 50% of the net proceeds from the assets forming the counterpart to the reserve fund and available reserves shall be allocated to the shareholders;
4. the balance shall be allocated to the State; it shall be exempt from company tax.

In 2011, the bank earned €900 million. Of this, a healthy  €61.6 was paid out to shareholders, with €225 and €618 allocated to the reserve fund and government respectively. The first dividend, it should be noted, amounts to a mere €600,000 a year, since it is based on a percentage of legacy paid-up capital from the 1800s. The second dividend provides pretty much all of the returns. Thanks to the floating nature of the second dividend, the NBB's dividends have appreciated nicely over the last decade:

Despite this stability, its shares, which trade on Euronext Brussels, have been volatile, falling from over  €4,000 per share in 2010 to under €2,000 last year:

Compare the NBB and BoG variability to the relative stability of the SNB, with its fixed coupon:

According to the SNB's 1997 Annual Report, the massive 1997 price spike was anomalous and due entirely to speculation surrounding the effects of the Bank's planned marking-to-market of their gold holdings:

The rise was apparently due to recommendations made in various broker reports, which were based on hopes that the planned revaluation of the gold reserves would generate additional earnings for the National Bank’s shareholders. However, the authors of these recommendations failed to note that the law earmarks for public use any profits in excess of the maximum dividend of 6%.

A sure example of the EMH not working.

It mystifies me why BOJ shares are so volatile. They promise a fixed and stable dividend, yet have collapsed from over ¥170,000 a share to ¥30,500 over the last few years. What happened in September 2005 that caused the shares to almost triple in value? Shares have recently rallied on the news that the BOJ will target 2% inflation, which is odd, since as a bond-like investment, the shares should fall with the promise of more inflation, not rise:

Below are the five central banks with their respective dividends and market capitalizations:

The NBB has the largest market cap, and justifiably so since it pays an attractive floating second dividend and, unlike the BoG, is a relatively stable institution. I find it amusing that the entire SARB can be bought for a mere $1.5 million. You can own a nation's central bank for the price of a large house!

What is even more odd is the terrific valuation being put on BOJ shares. In aggregate, BOJ shareholders earn a miserable $53,763 a year in dividends, only twice what SARB shareholders earn in aggregate. Yet the Japanese market is putting a value of $500 million on that cash flow, or 500x more than the value that shareholders put on SARB cash flows. BOJ shareholders have absolutely no claim on residual assets. What are they thinking?

Which one would I buy? Gun to my head, I'll take BoG shares. When things get back to normal they'll be paying a  €3 dividend which you can buy now for  €16 or so. But if you're going to take any profit from this post, hopefully its because it gives you another perspective from which to view centralized banking.