ING analysts wonder whether it is possible that central banks go bankrupt, with the increasing speculation that the U.S. Federal Reserve could introduce a new economic stimulus Quantitative Easing program, and European Central Bank buys bonds of the euro area countries, CNBC writes.
“With the power or the will of governments to stimulate the economy reduced, the attention is focusing back on central banks. The Capital of Fed is only $51.8 billion, which equals 1.8% of the value of assets. Any commercial bank with such a capital margin would be declared immediately insolvent and closed”, said Teunis Brosens, an economist at ING.
ECB resumed the bond program acquisition to calm the markets. The Euro system holds Spanish, Italian, Greek, Irish and Portuguese government debt of 110.5 billion euro, he added, noting that the depreciation of Greek assets is a distinct possibility.
But central banks are not like commercial banks, so the idea of their bankruptcy should be viewed differently. “For normal banks, the capital buffer reason is clear. The capital buffer, where predominant are the shares is the first to absorb the shock of any loss caused by the bank assets”, says Brosens.
Central banks, however, if they need money, they can simple print more money.
“When the Fed wanted to buy assets, it didn’t have to borrow, as would be customary for companies. The losses could force central banks to print more money, which in the case of institutions with strict inflation targets as Fed or the ECB conflicts with the priority objectives”, said the ING economist.
From a technical point of view, the moderate losses of central banks are irrelevant and do not force the institution to use the money printing and do not jeopardize the bank’s objectives. Central banks don’t go bankrupt even in case of serious capital problems.
“Credibility is the reason why these institutions fear of losses, not solvency. But in one way or another the central bank losses will be reflected on the taxpayer”, concludes Brosens.