What Are the Net Worths of Central Banks?

Determining the net worth of a central bank is not as commonly done, as it might be for examining the finances of a company, individual, or fiscal government.

After all, you generally can’t invest in a central bank – though the central banks of Belgium, Japan, Greece, Switzerland, and South Africa are all publicly traded.

Unlike corporations or individuals, central banks function with a unique set of financial mechanisms and operate with a different definition of solvency.

As the ultimate underwriters of financial stability, these institutions cannot easily be measured using conventional balance sheet metrics.

Key Takeaways – What Are the Net Worths of Central Banks?

• The net worth of a central bank is generally overlooked due to its unique financial mechanisms and role in maintaining economic stability.
• Central banks can have negative net worth due to losses incurred from interventions in the debt market (and other markets), but this does not indicate insolvency as they can always meet their liabilities through currency issuance.
• The focus should be on central banks’ ability to control inflation and manage economic stability rather than solely relying on traditional balance sheet metrics to assess their financial health.

Central Banks’ Unique Position

Central banks occupy a unique position in their respective economies.

They are responsible for maintaining economic stability and controlling the money supply.

The nature of their work allows them to accumulate vast reserves of foreign currencies, gold, and government securities.

However, these reserves don’t function like the assets on a regular corporation’s balance sheet, they are tools for monetary policy.

Long-Term Debt Cycle and Central Banks

The “long-term debt cycle” is a systemic pattern in the economy where periods of debt expansion are followed by periods of deleveraging when nominal interest rates hit zero.

During the deleveraging phase, central banks often intervene by buying up debt (and sometimes other assets like corporate credit or equities) to prevent a downward spiral of the economy via a lack of liquidity and lack of credit creation (from nominal interest rates that are too high relative to nominal demand).

This is where the potential for negative net worth comes into play.

This is because central banks can buy these bonds and then take losses on them when interest rates rise in the future (e.g., as they did when they bought bonds in 2020 and lost on them in 2021-22).

Central Banks’ Role in Debt Asset and Liability Levels

Throughout the course of the long-term debt cycle, the level of debt assets and debt liabilities can become unsustainably high due to unsound financial practices.

In this situation, central banks may step in, purchasing these debts to ensure stability in the market.

But these actions can impact the central banks’ balance sheets.

Negative Net Worth of Central Banks

The central banks’ interventions in the debt market, while necessary, can lead to significant losses.

As mentioned, if the value of the debts purchased declines significantly, this can result in a net loss for the bank.

This is how a central bank could technically have a negative net worth.

However, this does not mean that the central bank is insolvent, as their ability to create currency means they can always meet their liabilities in nominal terms.

Projected Increase in Debt and Its Impact on Central Banks

With current trends pointing towards an increasing amount of debt that will need to be absorbed by central banks, the financial outlook of these institutions may seem dire.

There are concerns that the losses they incur on the debts they purchase could push their net worth into negative territory.

Measuring the Net Worth of Central Banks

Given the unique economic role and financial structure of central banks, it’s challenging to define and measure their net worth in a meaningful way.

While they do have balance sheets, these institutions can operate with negative net worth due to their unique ability to issue currency.

The focus should rather be on the central banks’ capability to control inflation and manage the economic stability of a country (e.g., this can also include growth and exchange rate-related mandates).

Conclusion

While the idea of a negative net worth may be alarming when applied to individuals or corporations, the concept doesn’t carry the same weight when it comes to central banks.

Despite the challenges that high levels of debt may present, central banks have the tools to manage their balance sheets effectively.

Nevertheless, the scale of debts these institutions may need to absorb in the future due to unsound finances via fiscal channels throughout most of the developed world (in particular) remains a significant topic for economic debate.