Central bank losses: causes and consequences

​Central banks globally have recently shifted from reporting profits to recording sizeable losses. This article looks at why these losses are occurring and their potential consequences.

Can central banks continue to operate efficiently?

What do these losses imply for state budgets?​

Article published in the Economic Review of 2024

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Central banks in the Eurosystem and around the world recently shifted from earning profits to recording sizeable losses. This is a consequence of the dramatic changes in their balance sheets brought on by the unconventional monetary policies employed in response to recent crises. In short, under quantitative easing programmes, central banks purchased assets, leading to a massive increase in commercial bank reserves on the liabilities side of their balance sheets. When policy rates were raised recently to contain inflationary pressures, the interest rate mismatch between low-yielding longer-term bonds and bank reserves remunerated at the policy rate started to materialise.

While total losses may be sizeable for some central banks, they are expected to be temporary and recoverable. Moreover, central banks have been building up buffers to help them cope with these losses. Even if these buffers were to be depleted to the extent that central banks’ net worth turns negative, this need not pose a problem – as demonstrated by several historical examples. More generally, it should be noted that the primary objective of a central bank is to ensure price stability, not to make a profit.

Nevertheless, central bank losses have stoked public debate as they have consequences for state budgets and, thus, taxpayers. Indeed, over recent decades, major central banks have tended to distribute a large share of their profits to their governments, but these transfers have now either been suspended or significantly reduced.

Our conclusion is thus twofold. First, clear communication on the causes and implications of central bank losses is desirable. Second, while a temporary period of losses or even negative net worth is not necessarily a problem, the same cannot be said about more protracted periods of large central bank losses. As far as the Eurosystem is concerned, while the losses of some central banks may be sizeable, they are expected to be temporary and recoverable. A capital injection by the state is therefore not in order.