Can central banks go bankrupt?

The Almighty central banks could be colossi with feet of clay, trapped by their own monetary decisions. These institutes, which envy their independence and have the exorbitant power to create money, even to save economies, face unprecedented financial losses. Some are already asking states to bail them out, which could weaken their authority.

The National Bank of Belgium, listed on the stock exchange, has warned that it expects 9 billion euros in losses over five years. That of the Netherlands made it clear that it was likely to need a rescue from the State. This is already the case for the Bank of England, which is due to receive a transfer of 11 billion pounds (12,5 billion euros) from the state, and estimates that it needs 133 billion (151 billion euros). ) over the next five years – more than the 120 billion in dividends it had returned to UK public finances since 2009. The Swiss National Bank, for its part, posted a colossal loss of 142 billion Swiss francs (144 billion Swiss francs). euros) over the first nine months of the year.

How did we get here? A reversal in monetary policy around the world explains this unprecedented situation. From the great financial crisis of 2008 until the Covid pandemic, an accommodative monetary policy (quantitative easing) unconventional policy has led central banks to support economies through massive liquidity injections. In concrete terms, this consisted for them of acquiring government bond securities on the markets. In total, some $30.000 trillion in bonds with low yields, since interest rates were close to zero due to sluggish inflation at the time in developed countries, landed on their balance sheets.

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mountains of assets

At the same time, the European Central Bank (ECB) and a few others broke new ground with negative interest rates: commercial banks had to pay them for the privilege of placing their deposits there. Substantial profits have resulted: around 300 billion euros between 2012 and 2021.

Since the inflationary surge that began in 2021, the terms of the equation have reversed. Central banks have suddenly raised their rates (up to 4,50% across the Atlantic, 2% in the euro zone), which means that they must now pay banks interest on their deposits. Conversely, the mountains of accumulated assets remain subject to the floor rates at the time when these securities were issued. Hence a negative differential.

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For the ECB, the cost of remunerating bank deposits could reach 70 billion euros next year, estimates Frederik Ducrozet, head of economic research at Pictet. This could translate into a cumulative loss of 40 billion euros distributed among the nineteen national central banks of the eurosystem, according to Morgan Stanley.

Different situations depending on the country

The Banque de France is not yet in the situation of its Belgian or Dutch counterparts. After paying 3,5 billion euros in dividends to the state shareholder last year, it should remain in the green for 2022. Then, it plans to cover any losses with its reserves. These are less important in the Netherlands or in Belgium, hence the fragility of the respective monetary institutes.

As the only issuer of euro central bank currency, the Eurosystem will always be able to generate additional liquidity if needed.

Christine Lagarde, President of the ECB

Should we be worried? “As the only issuer of euro central bank currency, the Eurosystem will always be able to generate additional liquidity if needed, affirmed in 2020 the President of the ECB, Christine Lagarde. So, by definition, he is not at risk of bankruptcy or running out of money.”

Same logic for the powerful US Federal Reserve, which went into the red this year. It only has to carry over its losses from year to year without this causing it a problem – apart from the 50 to 100 billion dollars a year that it used to return to the treasury. For some economists, this question would therefore be a storm in a teacup.

While central bank losses are a non-event in theory, they can have important implications in practice, including fiscally.

Frederik Ducrozet, Head of Economic Research at Pictet

“While central bank losses are a non-event in theory, they can have important consequences in practice, especially on the fiscal front,” shade Frederik Ducrozet. If central banks are financially weakened to the point of asking governments for help, it could become more difficult for them to maintain their firmness in a monetary policy that upsets governments by raising the cost of borrowing. Unusually, Emmanuel Macron recently called on ECB leaders to "be very carrefully". The Italian government of Giorgia Meloni has also sharply criticized its hardening.