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Foreign central banks.

Among the four major central banks, only the Federal Reserve has changed a policy setting recently It raised the target for the overnight federal funds rate another 25 basis points (bp) to 3.00%. This was expected: Each successive 25 bp increase since June 2004 has been preceded by a statement that "policy accommodation can be removed at a pace that is likely to be measured."

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

 (billions Loss
 of national (U.S.
Bank currency) dollars)

 Central Bank 1.6 (euro) $2.2

Bank of Korea 150 (won) $146

 of 2003
Bank net worth) Explanations

 Central Bank 2.5% Revaluation
 of foreign-

Bank of Korea 1.9% Interest
 on Monetary

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%
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Publication:Economic Trends
Geographic Code:9SOUT
Date:May 1, 2005
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