In a report dated Oct 3, Fitch Ratings has said rising interest rates and falling securities valuations have increased the likelihood of losses for developed market central banks that have engaged in asset-purchase programmes. This may affect their ability to contribute to government revenues, and there is a risk that in some cases sovereigns could be called upon to restore central bank equity positions, the ratings agency points out.
Central banks are not part of the consolidated government balance sheet, but tend to distribute profits to their governments. They are usually profitable, as the rates they pay on their liabilities tend to be lower than the rates they earn on assets – not least because of seigniorage earnings from the creation of cash. However, the build-up of assets on central bank balance sheets in recent years has complicated this picture. The process initially lifted profits, but a number of central banks now appear likely to record losses for at least the next year or two.
“The recent rise in interest rates in most developed markets means that some central banks are now paying more on their liabilities to financial institutions than they are earning on their securities holdings, increasing the risk of losses,” Fitch Ratings says. For instance, the US Federal Reserve’s July 2022 Open Market Committee, for example, reported that projected net income is likely to turn negative in the next few months.
According to Fitch Ratings, mark-to-market accounting resulted in particularly large losses recently at the Swiss National Bank (SNB) and the Reserve Bank of Australia (RBACentral banks that use different accounting approaches, like those in the US, Japan and the eurozone, and those like the Bank of England and Reserve Bank of New Zealand that have government indemnities covering asset-purchase programmes, are less likely to experience extreme earnings volatility. However, indemnified losses represent a contingent liability for the sovereign.
Central banks’ gains or losses from asset purchases in the long run should not be significantly affected by differences in accounting treatment, but total gains or losses are difficult to assess. They will be affected by the path of interest rates, characteristics of specific asset-purchase programmes, and the approach to winding them down.
