The Role of Central Bank Capital Revisited

Central Bank Financial Strength and Policy Performance: An Econometric Evaluation

“…• As pointed out by Bindseil et al (2004), the key to understanding the fragility of sustaining perpetual losses is to acknowledge that central banks operate in an institutional set-up in which neither a complete separation from, nor a complete consolidation with the rest of the government's balance sheet is eternally credible. Were it true in the former case, and assuming that complete separation implies complete independence in the sense of never being stripped of its right to issue currency, perpetual losses might be feasible.…”

“…The exact nature of "perpetuation" of central bank losses, however, depends on the exact model specification. Under reasonable assumptions,Bindseil et al (2004) show that the central bank's debt will grow at a steady rate, even if banknotes in circulation disappear as a result of financial innovation. In Bindseil's model, central banks operating in a deterministic environment will always return to profitability as long as the growth rate of banknotes exceeds the growth rate of operating costs, regardless of the initial level of capital or operating costs.…”

Advancing the Monetary Policy Toolkit through Outright Transfers

“…Rather, it is the strength of institutions and monetary policy frameworks that matters, which allows central banks to independently pursue an appropriately tight (or lose) monetary policy stance. These findings are corroborated by Bindseil et al (2004), who show that negative central bank equity at varying levels does not impinge on central banks' abilities to control interest rates. However, they also caution that maintaining a strong balance sheet position remains generally advisable for political economy reasons.…”

Central bank digital currencies and financial stability in a modern monetary system

“…For instance, Stella and Lonnberg (2008) show that at least 15 Latin American central banks had losses for five or more years between 1987 and 2005. As long as an automated and fully credible rule of re-capitalisation by the government of the monetary authority in case of negative worth is implemented (Bindseil et al, 2004), losses do not necessarily jeopardise the central banks' monetary policy targets. In this paper, both having monetary losses and preserving financial stability may coexist.…”