(The author is a Reuters Breakingviews columnist. The opinions
expressed are her own.) (Refiles to fix links.)
By Agnes T. Crane
NEW YORK, March 1 (Reuters Breakingviews) - Central banks
which control their own currencies do not go bust. Yes, the U.S.
Federal Reserve and other central banks with bloated balance
sheets are likely to book losses when interest rates rise. That
must be why U.S. Senator Bob Corker this week asked Fed Chairman
Ben Bernanke about the institution's solvency. But no amount of
red ink should bleed them dry. That's because despite their
name, central banks are monetary authorities, not really banks.
Their main job isn't to lend money. Central banks, instead,
squeeze and pull a nation’s monetary base, trying to keep
inflation low, growth high and the financial system stable. Over
the past four years, the U.S. central bank, followed by peers
around the world, has exercised that mandate by buying trillions
of dollars of bonds.
That sounds expensive, but monetary authorities, unlike real
banks, have no trouble finding the necessary funds. They simply
create new money.
Take the Fed. It now has a $3 trillion balance sheet with
just $55 billion in equity. If it were a normal bank, that would
equate to leverage of 55 to 1, breaching capital requirements
several times over. But it's not. Central banks don't need
equity capital. They put it on the balance sheet for
There's the rub. Perception matters. Politics do, too.
Earlier this year, Fed economists published a paper forecasting
what will happen to its vast holdings of Treasuries and mortgage
bonds when interest rates go up. In a worst-case scenario, the
losses could run as high as $125 billion, leaving the Treasury
with zero income from the Fed for six-and-a-half years. After
receiving nearly $300 billion over the past four years,
lawmakers are sure to squawk about the lost revenue.
Senator Corker's questions hint at the political battle
ahead. If it gets heated enough, lawmakers could try to
interfere with monetary policy in the middle of what’s sure to
be a complicated exit. That would be unfortunate. The European
Central Bank, however, may even have it worse. Political
pushback could jeopardize its ability to recapitalize, since all
member countries must agree to an equity injection.
And this is where the danger resides: not in a central
bank's solvency, but in the public's perception. If Bernanke and
others aren't persuasive enough to allay concerns about losses,
the QE experiment could come to an ugly end.
SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS:
- U.S. Republican Senator Bob Corker sent a letter to Ben
Bernanke asking the Federal Reserve chairman to explain the
policy implications of a large central bank balance sheet. The
letter followed an exchange between Corker and Bernanke during
his semiannual congressional testimony on Feb. 26.
- In 2012, the Federal Reserve paid $88.9 billion of its
estimated net income to the U.S. Treasury.
- In January, the Fed released a study on the effect of
rising interest rates on its balance sheet and earnings. In a
worst-case scenario, the economists found losses would reach
$125 billion if interest rates increased by 3 percentage points.
In that case, remittances to the Treasury would cease for
- Corker letter: link.reuters.com/keb46t
- Fed study: link.reuters.com/meb46t
Beckettian Ben [ID:nL1N0BQ7PA]
All about rates [ID:nL1N0BC7KH]
- For previous columns by the author, Reuters customers can
click on [CRANE/]
(Editing by Edward Hadas and Martin Langfield)
Keywords: BREAKINGVIEWS CENTRALBANKS/
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