Invest in a company that cannot go bankrupt

A key driver of the equity risk premium is compensation for the possibility that a company can go bankrupt and shareholders can lose all their money. But there are a few stocks out there that allow investors to own stakes in companies that cannot go bankrupt. Ever. What a great investment they would be.

The companies I am talking about are central banks. While the vast majority of central banks are owned by the government, a precious few are publicly listed and allow everyone to take a stake. Mind you, the public is allowed to only take a minority share so if you work for an activist hedge fund, forget about taking a controlling stake.

Historically, the most prominent central bank that was publicly listed was the Bank of England, which was established as a stockholding corporation in 1694 but was nationalised in 1946. Today, four central banks still have public shares listed on their national stock exchange: The Swiss National Bank, the Belgian National Bank, the Bank of Greece, and the Bank of Japan.

What makes central banks special and why they are so often misunderstood by investors is that it is impossible for them to go bankrupt. Any company faces the risk of bankruptcy if it makes so many losses that it uses up all its capital. When that happens, the company either has to raise new capital (equity or debt) or seize operations and file for bankruptcy (or more commonly for restructuring).

But central banks are different because unlike any other entity in the world, they can create their own equity capital out of thin air. If they are making losses that eat up their capital, they can simply create new equity capital for themselves and become solvent again.

This is why all that talk about the Fed making endless losses and the government having to rescue them is nonsense. The Fed like any other central bank doesn’t even have to ask the government for a bailout, they can simply bail themselves out. And no, none of that will lead to more inflation, because the central bank simply creates that equity capital and keeps it on its balance sheet without ever lending it to banks or other players. It’s a brilliant deal if you can get it.

But are central bank stocks a good deal for investors, too? They are clearly much safer, but also have much lower returns. In fact, the four listed central banks have done miserably over the last decade or two. The only central bank where the share price could keep up with the MSCI World is the Swiss National Bank. And that is only due to the massive rally in 2017 and 2018 when the central bank made huge windfall profits from its holdings in Euro and stocks it accumulated during the period when it pegged the Swiss Franc to the Euro. Today, the Swiss National Bank is less a central bank and more a major Sovereign Wealth Fund.

Apart from that special effect in the case of the Swiss National Bank, it seems that the track record of investments in central banks is pretty miserable.

The performance of listed central banks

Source: Bloomberg, Liberum.