Cen­tral bank prof­its may not be crit­i­cal but still a good sign

The Star Malaysia - StarBiz - - Foreign News -

FRANKFURT: There are good rea­sons why cen­tral banks should think about profit as well as mone­tary pol­icy, ac­cord­ing to a new study.

Fi­nan­cial strength can help mone­tary in­sti­tu­tions ful­fill their man­dates and in­di­cate the suc­cess of in­di­vid­ual poli­cies, Francesco Chi­ac­chio, Gre­gory Claeys and Francesco Pa­pa­dia write in a paper pub­lished yes­ter­day by Brus­sels-based think tank Bruegel. Cen­tral­bank in­come also presents a rev­enue source for govern­ments, a fac­tor that’s gained in­ter­est since the Euro­pean Com­mis­sion pro­posed ear­lier this year set­ting up a rainy-day fund us­ing that money.

“While a cen­tral bank does not need to gen­er­ate prof­its to ful­fill its macroe­co­nomic func­tions, it is bet­ter if it does,” the econ­o­mists wrote. “Over­all, the Eurosys­tem has so far re­spected this prin­ci­ple.”

At the Euro­pean Cen­tral Bank, prof­its have been fairly sta­ble over the years since its cre­ation.

At the same time, pol­icy mak­ers have stressed that their pri­mary goal is and will re­main price sta­bil­ity, what­ever the bot­tom line may be at the end of the year.

The euro area’s 19 na­tional cen­tral banks and the ECB rely on sev­eral lay­ers of in­surance to pre­vent losses, if they oc­cur, from erod­ing the in­sti­tu­tions’ cap­i­tal. Prof­its on hold­ings such as gold and for­eign ex­change are re­tained in reval­u­a­tion ac­counts, and pro­vi­sions are made for any risks that may emerge in the fu­ture.

Those pro­vi­sions may be drawn on when cen­tral banks have to pay in­ter­est again on banks’ de­posits, while not mak­ing enough them­selves on the bonds ac­quired un­der quan­ti­ta­tive eas­ing.

While the ECB says on its web­site that any losses not cov­ered by pre­vi­ously ac­cu­mu­lated reserves can be kept on the bal­ance sheet and off­set against fu­ture in­come, pol­icy mak­ers have ex­pressed reser­va­tions about neg­a­tive cap­i­tal in the past.

Bruegel dis­putes the view that such a sit­u­a­tion nec­es­sar­ily leads to im­paired in­fla­tion con­trol or less in­de­pen­dence.

“There have been many ex­am­ples of cen­tral banks with neg­a­tive ac­count­ing cap­i­tal -re­sult­ing from sus­tained losses – which have been nonethe­less able to ful­fill their macroe­co­nomic man­dates with­out ma­jor hur­dles,” the econ­o­mists wrote.

“While one can ques­tion, in the­ory, the rel­e­vance of cen­tral bank prof­its, in prac­tice it is prefer­able for the cen­tral bank to re­main in a rea­son­ably prof­itable sit­u­a­tion.” — Bloomberg

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