US Treasury eyes IMF and World Bank wealth fund guide

The US Treasury on Thursday called on the International Monetary Fund and the World Bank to develop a best practices guide for fast-growing sovereign wealth funds that invest foreign exchange assets.
Clay Lowery, the Treasury's acting under secretary for international affairs, said he believes such funds can provide diversification and higher returns to foreign governments, but their growth poses risks to financial market stability.
"Sovereign wealth funds raise issues of the appropriate institutional arrangements, governance, operational and risk management, accountability, and - critically - transparency of the funds rules, operations and asset management guidelines," Lowery said in a speech delivered to a San Francisco Federal Reserve conference on the 1997 Asian financial crisis.
He said private estimates of sovereign wealth fund assets were now in a range of $1.5 trillion to $2.5 trillion and were expected to grow. It will take a lot of work to integrate them as smoothly as possible into the international financial system, he added.
But sovereign wealth funds are typically not regulated by their domestic financial authorities, a situation that needs to change, Lowery said, adding that they should be treated like any other large institutional investor and run as independently as possible.
Lowery also said there was a risk that the size, investment policies and operating methods of such funds could be used to fuel protectionism, with some nations blocking sovereign investment. He said jointly developed best practices from the IMF and World Bank would be a "very constructive step, but cautioned against them taking a more active role.
"One caveat is that I do not think that the international financial institutions should be in the business of competing with the private sector to manage reserves or sovereign wealth fund assets," Lowery said. "This is clearly beyond their mandates."
He said he would expect that finance ministers of both industrialised and developing nations would increasingly discuss the issue of private wealth funds, and these discussions would complement the IMF and World Bank efforts.
But he noted that such discussions should not lose sight of key underlying issues, including the need for increased exchange rate flexibility in many markets and the need for oil exporters to implement fixed investment plans.