How central bank losses can be handled

• Author: John Dalton/Claudia Dziobek
• Position: IMF Monetary and Financial Systems and Statistics Departments
• Pages: 362-363

Page 362

In normal circumstances, a central bank should be able to operate at a profit, based on seigniorage-the net revenue it earns as the issuer of the national currency. For various reasons, however, a number of central banks across the world have recorded losses over the past two decades.Why should this raise concerns, and what can be done about it? A recent IMF Working Paper lays out principles and practices for handling central bank losses.

Central bank losses can arise in several ways. They can stem from day-to-day operations-when operating expenses exceed operating income-or when revaluation losses on assets and liabilities (including currency revaluations) occur.

Central banks have also incurred losses in connection with activities that go beyond their conventional functions of stabilizing the country's currency and domestic price level. The central banks of Bolivia, Chile, The Gambia, Guyana, Jamaica,Madagascar, Peru, the Philippines, and Turkey, for example, incurred significant losses during the 1980s and 1990s as a result of various quasi-fiscal activities, such as the provision of subsidies or price guarantees, and costs associated with financial sector restructuring. In a number of these cases, the accumulated losses were equivalent to a significant proportion of GDP before they were addressed.

Even good policies may see losses

In recent years, the pursuit of sound policies by many central banks-in both developing and advanced economies-has contributed to historically low inflation and interest rates, including on liquid assets denominated in reserve currencies. The associated low yields on international reserves, together, in some cases, with currency revaluation losses, have negatively affected the profits and capital positions of a number of central banks. In 2004, for example, the European Central Bank (ECB) incurred net losses of some euros 1.6 billion largely from an appreciation in the external value of the euro. This saw write-downs (of some euros 2.1 billion) of the euro value of the ECB's holdings of foreign reserve assets because of revaluations. Financial buffers established by the ECB and its member central banks absorbed these losses, and the net worth of the ECB remained positive.

Elsewhere, the Reserve Bank of...