Do central banks have a comparative disadvantage at holding risky assets? Are central banks the widows and orphans of financial institutions?

Those people who are relatively less risk-averse will hold relatively more relatively riskier assets; and those people who are relatively more risk-averse will hold relatively more relatively safer assets. It's all about comparative advantage, or comparative willingness to accept risk.

Other things equal, I would prefer to hold a safe asset than a risky asset, because I don't like risk. But other things are not equal, precisely because other people don't like holding risky assets either. So risky assets are priced at a discount to safe assets, and so yield a higher expected rate of return than safe assets, and so some people are willing to hold some risky assets, despite their risk, and despite their risk-aversion. Every asset, even the most risky, is held by someone.

We could ask the same question about illiquid assets. Why shouldn't central banks buy illiquid assets? "Because illiquid assets are illiquid!" is not the answer. Other things equal, I would prefer to hold a liquid asset than an illiquid asset, but other things are not equal, precisely because other people don't like holding illiquid assets either.

Do central banks have a comparative disadvantage at holding illiquid assets? That just sounds weird, because central banks themselves produce the most liquid assets of all.

You can make a case, as I did once, that central banks should sometimes actually prefer holding risky assets, even if other things were equal. But let's set that case aside. And you can make a case, in a liquidity crisis, that central banks should actually prefer holding illiquid assets, even if other things were equal. But let's set that case aside too.

As a purely benchmark case, we could imagine central banks holding the market portfolio of assets, with the same mix of safe and risky, and liquid and illiquid assets, as the average holder of assets. Starting at that benchmark, what are the arguments why central banks should move in one direction rather than the other?

What should make central banks relatively more averse to risk and illiquidity than the average holder of assets?

Again, "Because risky assets are risky, and illiquid assets are illiquid!" is not the answer. (So don't even think about saying that in a comment.) And "Because central banks are banks!" is not a good answer either, because they aren't, and because central banks seem even more risk-averse and illiquidity-averse than banks that really are banks.

And remember, the biggest asset that a central bank owns does not even appear on its balance sheet: that's the expected present value of its future seigniorage profits from printing money. (Background reading: my old post on why central banks hold any assets at all.)

I was thinking about the ECB and Greek bonds. Why not buy risky Greek bonds, at a market discount to safe bonds? Why not just buy the market portfolio of government bonds, if you want to do QE? And why just government bonds, and why just bonds? And then reading the latest missive from the Bank of Canada about its haircut policy. And realising I had no theoretical framework to even begin to answer these questions.

If I buy a Greek bond, am I bailing out the Greeks?

What is it about dumb questions like these? Why aren't they the first questions that get asked and answered?