Can Central Bank make Losses?

Ideally they can, but didn’t know of any cases of the same.

Here is a nice short paper which tells you cases of central bank losses – Brazil, Chile, Czech Republic, Hungary, Korea and Thailand.

Did the list ring something? Well all of them are inflation targeting central banks as well. Here is a comparison list:

  Year of Loss Year of IT implementation
Brazil 1997 Jun-99
Chile 1997 Sep-99
Czech Republic 1996 Dec-97
Hungary 1996 Jun-01
Korea 1994 Apr-98
Thailand 1997 May-00

I have read many papers on why IT was adopted (and also why not) in a particular country and have posted them on the blog as well (see this). However, so far have not seen central bank looses mentioned as a reason for adopting ITF.

Here is a look at reasons for losses:

  Reasons for loss
Brazil Interest rate differential between domestic liabs and foreign assets
Chile Interest rate differential between domestic and foreign leading to losses in sterilization operations, recapitalise banking system losses
Czech Republic Interest rate differential between domestic and foreign leading to losses in sterilization operations,
Hungary Interest rate differential between domestic and foreign leading to losses in sterilization operations, foreign borrowing agent for Hungary
Korea Interest rate differential between domestic liabs and foreign assets
Thailand Interest rate differential between domestic liabs and foreign assets

In all the 6 cases (In Chile it was also because of banking recap losses), it is a case of Interest rate differential in domestic assets and foreign assets. The foreign assets have been acquired in turn because of sterilization operations to manage capital inflows and maintain fixed exchange rates. 

As these 6 central banks were engaged in forex stability, bank regulation etc and suffered losses. An ITF allowed the banks to focus on inflation and do away with these additional responsibilities. So, somewhere down the line I think these losses also seem to be an important lesson and reason for them to move to an ITF. Though, the losses were small in some cases, the possibility of higher losses could be an important factor.

4 Responses to “Can Central Bank make Losses?”

  1. Can Central Bank make Losses? Says:

    […] Random Feed wrote an interesting post today onHere’s a quick excerptIdeally they can, but didn’t know of any cases of the same. Here is a nice short paper which tells you cases of central bank losses – Brazil, Chile, Czech Republic, Hungary, Korea and Thailand. Did the list ring something? Well all of them are inflation targeting central banks as well. Here is a comparison list: Year of Loss Year of IT implementation Brazil 1997 Jun-99 Chile 1997 Sep-99 Czech Republic 1996 Dec-97 Hungary 1996 Jun-01 K […]

  2. Can Central Bank make Losses? Says:

    […] News Sources wrote an interesting post today onHere’s a quick excerptIdeally they can, but didn’t know of any cases of the same. Here is a nice short paper which tells you cases of central bank losses – Brazil, Chile, Czech Republic, Hungary, Korea and Thailand. Did the list ring something? Well all of them are inflation targeting central banks as well. Here is a comparison list: Year of Loss Year of IT implementation Brazil 1997 Jun-99 Chile 1997 Sep-99 Czech Republic 1996 Dec-97 Hungary 1996 Jun-01 K […]

  3. Can Central Bank make Losses? Says:

    […] Implementation, Inflation Targeting, Korea, Losses, News Sources, Thailand, Year Of Loss News Sources wrote an interesting post today onHere’s a quick excerptIdeally they can, but didn’t know […]

  4. Rajendra Says:

    Nice post. Recently Swiss National Bank has also made a loss of CHF 4.7 billion in 2008. This was primarily due to exchange rate losses on foreign currency investments. Although the SNB has never announced a formal inflation target, price stability is widely recognized as the overriding goal.

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