When a company tells its shareholders that it expects to suffer 9 billion euros in losses over the next five years, which will more than wipe out all its provisions and equity, it would usually trigger a crisis. existential. The normal rules do not seem to apply to the Belgian central bank.
The National Bank of Belgium’s warning – which included scrapping its main dividend payment this year – sent its shares down around 18% last week. But he was still able to reassure investors that his financial setbacks “would not call into question his stability”.
“After all, a central bank can continue to operate, at least temporarily, with a negative capital position,” said the 172-year-old institution, which is one of 19 national central banks that share the euro and are the main shareholders. at the European Central Bank.
As central banks around the world raise interest rates sharply to fight soaring inflation and unwind their massive bond purchases, economists expect many to suffer steep losses. because they now have to pay more interest to commercial banks than they earn in other areas.
Eurozone central banks will have to pay about 70 billion euros in interest on commercial bank deposits next year, according to an estimate by Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management. This sum is far larger than in recent years due to the ECB’s aggressive monetary easing from 2014-21, when negative rates meant lenders paid to deposit money at the central bank.
The scale of payment on deposits will push many eurozone central banks into the red, Ducrozet warned, adding that some “could face increasing political pressure to recapitalise”.
Some believe it will just be a “storm in a teacup”, as Danske Bank strategist Piet Haines Christiansen said, pointing out that central banks are not about making profits and cannot go bankrupt when they have the power to print money, generating revenue. on the production of money through a process called seigniorage.
“It doesn’t matter in economic terms because a central bank can work very well with less capital, even with negative capital,” said Erik Nielsen, chief economic adviser at Italian bank UniCredit.
Several central banks have already fallen into negative equity in the past without causing major problems, including those of the Czech Republic, Sweden, Chile, Israel and Mexico.
However, others warn that increased losses could have several unwanted side effects. Most monetary authorities are nationalized. And part of their profits – including those of Belgium, which is 50% state-owned – went to finance ministries.
The fall in central bank dividends will therefore weigh on public finances. If the losses become too great, they may need bailouts from the state which may increase political pressure and threaten their independence.
“It’s hard to say whether this will ultimately involve a loss of independence,” said Sandra Philippon, chief economist at Dutch bank ABN Amro. “Of course, the recapitalization of states does not help [central banks] be more independent. »
Over the past decade, central banks in the eurozone have made solid profits, totaling around €300 billion between 2012 and 2021, mainly thanks to the income from the bonds they bought during this period and negative interest levied on commercial bank deposits.
While some of these profits went to national governments, they also used much of it to build up reserves that could absorb losses as they rolled back their ultra-loose monetary policies.
These cushions have come into play since central banks began to raise interest rates sharply. The ECB, for example, said it and the 19 national central banks in the euro area had set aside €116 billion in provisions and €116 billion in reserves and capital, adding that “our net equity is large enough to withstand any shortfalls”.
Some central banks are also suffering losses on the large bond portfolios acquired in recent years. The Reserve Bank of Australia recently announced a book loss of A$37 billion ($25 billion) on its pandemic bond purchase program, leaving it with a negative equity position of A$12 billion.
The UK’s Office for Budget Responsibility has estimated that the Bank of England would need to be paid £133bn by the government over the next five years to cover losses on its quantitative easing portfolio.
Some central banks have also invested their own funds in securities, exposing them to losses after they fall in value. An extreme example is the Swiss National Bank, which warned in October that it had already posted a record loss of 142.4 billion Swiss francs ($152 billion) in the first nine months of this year, mainly due losses on its investments made with its foreign exchange reserves. .
Major central banks, such as the ECB and the US Federal Reserve, can deal with any negative capital by accumulating “deferred assets” until they return to profitability, which would allow them to avoid a bailout. of State.
Still, such a scenario would be uncomfortable, especially when the ECB has publicly criticized other European central banks, such as the Czech National Bank, for having negative equity. It would also come at a time of growing political criticism from politicians over the monetary policy response to soaring inflation.
“Particularly in a situation where central banks are struggling to restore their credibility as inflation fighters, negative equity would be counterproductive,” said Carsten Brzeski, head of macro research at Dutch bank ING. .
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