Foreign central banks.
Central banking commonly is considered innately profitable. Typically, it involves the sale of non- or low-interest-bearing money to banks and the public in return for interest bearing loans and securities. For example, since 1914 the Federal Reserve has maintained modest capital growth by transferring about $13 billion of earnings to surplus after paying statutory dividends of $6.5 billion to member banks. The remaining $549 billion of cumulative earnings were transferred to the U.S. Treasury.
Losses do occur, however. The European Central Bank (ECB) recently announced a 1.6 billion [euro] loss for 2004 after a 0.5 billion [euro] loss in 2003. The proximate cause of these losses was not profligate spending but prudent accounting. The ECB holds a substantial amount of assets denominated in foreign currencies, principally U.S. dollars, which it revalues on its balance sheet when exchange rates alter. Euro appreciation resulted in unrealized revaluation losses of almost 2.1 billion [euro] in 2004, deducted from income. The Bank of Korea reported a loss of 150 billion won for 2004; the proximate cause apparently was not revaluation but the interest expense of issuing securities intended to sop up liquidity that was created in trying to prevent appreciation of the won.
Examples of Central Bank Losses, 2004 Loss (billions Loss of national (U.S. Bank currency) dollars) European Central Bank 1.6 (euro) $2.2 billion Bank of Korea 150 (won) $146 million Loss (percent of 2003 year-end Bank net worth) Explanations European Central Bank 2.5% Revaluation of foreign- currency- denominated assets Bank of Korea 1.9% Interest payments on Monetary Stabilization Past Examples of Central Bank Losses Loss (billions Loss (percent of national of prior year- Bank Year currency) end net worth) Korea 1994 73.3 (won) 7% Czech Republic 1996 8.7 (koruna) 32% Hungary 1996 51.6 (forint) 108% Brazil 1997 1.9 (real) 52% Chile 1997 756.6 (peso) 570% Thailand 1997 67.7 (baht) 147%