SUERF BAFFI Bocconi e-lecture

Why are central banks reporting losses? Does it matter?

Tuesday, 21 March 2023 | 15:00-16:15 CET | online via Webex

Central banks have increasingly deployed their balance sheets in as a tool to pursue macroeconomic and financial stability objectives in support of their economies and to prevent inflation from falling far below target. After the Great Financial Crisis (GFC) and the European sovereign debt crisis as well as during the COVID pandemic, several advanced economy (AE) central banks used asset purchase programmes (APPs) or other lending programmes to achieve their policy aims. In doing so and to pursue their policy objectives, central banks took financial positions, which influence their profits and losses as a by-product. As policy rates are being hiked sharply to fight high inflation, several central banks incur sizeable losses as a result of their asset-liability composition. These losses may persist and even increase in coming years. Do such losses represent a threat to central banks’ financial independence and their credibility with regards to their anti-inflationary commitment? Why is insolvency (not) a concern for central banks? How could large and/or persistent losses be addressed in accounting terms? Will taxpayers’ money have to be injected, or will central banks just not transfer seigniorage income to governments for years to come? Ultimately, losses and negative equity do not directly affect the ability of central banks to operate effectively. In normal times and in crises, central banks should be judged exclusively on whether they fulfil their mandates. Central banks can underscore their continued ability to achieve policy objectives by clearly explaining the reasons for losses and highlighting the overall benefits of their policy measures.