“..they’d swallow a big lie and choke on a little fib”

from the Terry Pratchett novel ‘Maskerade’

*All references to “Asia” in this article pertain to the geographic mass viz. Far East Asian countries, South East Asian nations, South Asia and the Middle East

A spelling mistake on the word “foundation” helped to prevent the New York Fed from making a $1 billion transfer out of the account of the Bangladesh central bank, as widely reported this week. When hackers seized control of the Bangladesh Bank accounts, they stole credentials of key officers and using these, directed the New York Fed where the Bangladesh Bank had some of its foreign exchange reserve accounts, to make some transfers.

While the bigger heist of $1 billion was prevented due to the spelling mistake, the hackers still got away with $101 million in illegal transfers of which $20 million that went to Sri Lanka was recovered while the balance, sent to banks in the Philippines, is as yet unaccounted for. Officials in the Bangladesh Bank have threatened to sue the New York Fed if the monies aren’t recovered.

The above is a summary of varied news articles on this subject for the past 24 hours. Looking through it though, I couldn’t help but think of a more obvious question – namely, why are Asian central banks so upset about a bunch of hackers when they are losing far more money on their core investment holdings?

Think of the numbers – Asia has about $5 trillion (that’s the number 5 followed by a ridiculous 12 zeros) invested in the highest quality US and European securities adjusted for maturity profiles, average returns are close to -0.5% to -1% (while much of the US treasury curve remains positive yielding, the same isn’t true of most other countries ranging from Japan to UK). That’s $25 billion to $50 billion lost by these central banks annually. By the way, the returns are before currency volatility – if measured in USD terms, returns on holdings of European securities would lose more than 1% given the sharp decline in the EUR over the past 2 years. If I were to consider the activities of various sovereign wealth funds whose investments (and therefore losses) go into other assets including stocks and commodities, these numbers would be significantly worse.

Bangladesh central bank logo

Mull that number for a second – you are losing $50 BILLION (that’s the number 5 followed by 10 zeros) across the region, and someone makes a fuss about losing a mere $101 million. Here’s the better story – no one has even complained about Asian central banks as a group effectively transferring this level of wealth to the US and Europe.

If anyone in Asia ran on an election platform wherein they promised to remit that kind of money to the US and Europe, I certainly missed that. Alright – perhaps that sentence was too cute. Central bankers around the world are unelected, and as we can see above, have incurred terrifying investment losses without a whole lot of public scrutiny around the region.

I am well aware of the reasons Asian central banks take that kind of pain on their reserve holdings:

  1. Need to maintain reserves to pay for reasonable trade flows
  2. Avoid significant short-term currency appreciation due to investment flows
  3. Cushion for foreign currency denominated liabilities being racked up local banks and companies
  4. Strategic priorities (more applicable for tottering Arab monarchies)

Even so, the costs of these objectives must be dynamically measured; instead of Asian policymakers simply assuming that goals and objectives remain fixed forever. What would you do, when confronted with the following dilemmas

  • Certainty of losing of 5% on your investments versus a similar appreciation in your currency that may cause a small change in your competitive position
  • Now add a game theory angle – viz., if you are the biggest holder of these assets (like the Chinese central bank), do you act first or last in an investment trend?

For the Far Eastern export powerhouses (Japan, China, Taiwan, South Korea) the second part of the question is a pressing preoccupation, essentially placing the group into a classic ‘prisoners’ dilemma’. Instead of figuring out innovative solutions (or actually talking to each other – Wow! how novel would that be), this preoccupation with game theory has been the key stumbling block for this group to undertake any action at all. In other words, inaction has been justified by the often unjustified fear of what other bankers would do, thereby ensuring investment losses for all regional central banks. As a longer shot and given their relationship as key suppliers to Korea, China and Japan the Southeast Asian countries have tended to follow the practices of the Far Eastern bloc.

At least the interests of South Asian and Middle Eastern central banks aren’t entirely aligned with those of the central banks of the Far East. But you wouldn’t know that by looking at their policies either, as every one of them – the aforementioned Bangladesh Bank included – follows the policy of maximum reserve allocation even in the face of guaranteed investment losses.

Wall Street’s nightmare

Given recent restrictions on trading book liquidity and the deleterious effects of the negative interest rate environment, perhaps one of the biggest nightmares for any bond trading desk on Wall Street goes as follows:

Caller “Hi, this is xxx from YYY (Asian central bank)”

Trader “yes sir good morning”

Caller “what do you price the 5 year German government bond”

Trader “-0.275%”

Caller “Okay, €50 billion yours”

Trader faints

Many of the most recent episodes of market meltdown have centred on the lack of liquidity for trading desks thanks to new rules imposed on global banks (ironically by regulatory arms of the very same central banks that will now need these very trading desks to exit their very sticky positions). Add to this the angst of trading losses that is forcing many investment banks to shut down their trading desks in various locations and the overdependence of whoever remains is not just apparent, but also suggesting that remaining desks will simply not have the ability to close these trades.

Thus, even if Asian central banks – separately or together – signalled an intention to change their investment strategies, it is unlikely that actions can be undertaken in the context of currently available market liquidity.


So you have the perfect crime here – no one really knows that the crime is being committed viz. that $50 billion maybe pilfered from Asian central banks every year without anyone taking a second glance at this number. Without public scrutiny, Asian central banks do not have an impetus to change their strategy; and in any event can use the “fear of the neighbour” to justify continuation of the current strategy.

Nice job if you can get it.

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