After years of regular profits, many central banks are posting heavy losses, including the Swiss National Bank. How solid are the central banks?
Almost with the regularity of Swiss clockwork, central banks around the world have generally made profits year after year. But with the sharp rise in interest rates, many central banks are now reporting large losses on the financial assets they acquired over the past decade.
Together with high inflation, the loss figures, some at record highs, are tarnishing the image of the monetary guardians. And worse for the central bankers, it also plays into the hands of critics of quantitative easing.
Spotlight on the SNB
The Swiss National Bank (SNB) has probably been hit the hardest. According to preliminary figures, it is reporting a record loss of 132 billion francs ($142 billion) for 2022, as finews.com reported.
That sum is equivalent to nearly 18 percent of Swiss GDP and might be the largest loss ever recorded by a central bank in a single year, the Peterson Institute For International Economics recently observed.
Just as the SNB will not make a profit distribution to the federal government and cantons this year, other central banks that bought assets such as bonds and other securities on a large scale during the recent crisis are unlikely to contribute to government coffers.
On Solid Footing
But are central bank losses as significant as the headlines sometimes suggest? The Bank for International Settlements explores this question in a working paper.
Critics' worries appear to be exaggerated. Despite some enormous losses, central banks remain sound, and the losses do not threaten the underlying role of these institutions. They can operate effectively even with steep losses and negative equity. Many already have.
Unlike commercial banks, central banks cannot become insolvent in the traditional sense because they can, in principle, issue more money to meet their obligations in national currency. They are also not subject to minimum regulatory capital requirements.
Not a Treasury
The most important task of a central bank, the authors argue, is to fulfill its mandate, not to make a profit. To be sure, a central bank's losses are reflected in consolidated government finances. But the purpose of central banks is not to serve as a source of revenue for governments. They are there to fulfill their policy mandates, including price and financial stability as well as economic growth and employment, depending on the bank's charter.
In times of crisis, central banks may need to take on additional risks. The unique nature of central bank instruments means that losses are sometimes the price that must be paid to achieve their objectives.
Clear Communication
The success of their interventions should therefore always be measured by the fulfillment of their mandates, according to the study authors. If central banks were to neglect their mandates to avoid a loss, far greater damage would result. But when losses accumulate, clear communication is crucial, the Bank for International Settlements says.
