A central bank can conduct an effective monetary policy with low equity
News, Staff memo Neither weak financial results nor low equity limit the short-term prospects of monetary policy. Central banks, unlike private banks and other commercial activities, are not at risk of bankruptcy and can normally generate the resources they need to meet their obligations. In the long term, however, a sufficient earnings capacity is needed to cover the costs of the central bank and to create adequate buffers. These comments are made by Amanda Nordström and Anders Vredin in a new Staff memo on central banks' equity and monetary policy.
The question of whether a central bank's financial results and equity matter for the formulation of monetary policy is not new, but has been discussed from time to time. The authors summarise the literature in the field in their Staff memo. In addition, the issue of central banks' financial independence is raised, given the losses that are now expected for central banks around the world.
Both theoretical arguments and practical experience suggest that neither financial results nor equity limit the scope of monetary policy, at least not in the short term. However, if the central bank has poor capacity to cover its costs and maintain adequate financial buffers over the longer term this could nevertheless affect independence and monetary policy credibility.
By Amanda Nordström and Anders Vredin, working in the Monetary Policy Department of the Riksbank.