How about that, central banks can go broke. From Alasdair Macleod at goldmoney.com:
Behind the battle to convince everyone that price inflation is not a lasting problem is the necessity to keep interest rates and bond yields suppressed. In the past, the interest rate cycle was entirely due to the expansion and contraction of commercial bank credit. But that was before central banks built up bond portfolios through quantitative easing.
Not only does this expose them to the interest rate cycle, but they have not increased their capital base to keep pace with the expansion of their balance sheets. Hence the problem with rising interest rates and bond yields: on a mark-to-market basis the major central banks are insolvent with balance sheet liabilities now exceeding their assets.
This article finds this condition true of the Bank of England, the Federal Reserve Board, the Bank of Japan, and the entire euro system. Other central banks are not examined.
Doubtless this will be resolved in the short term by governments investing more equity in their central banks. But there is one major exception, which is the ECB and the euro system, with all its shareholders sinking into negative equity with the only minor exceptions of the Irish, Maltese, and Slovenian central banks.
Consequently, with the interconnectedness of the global financial system, the ability of central banks to guarantee the survival of their own commercial banking networks has almost certainly ended due to a collapse of the euro system. The precedent is the failure of a prototype central bank in 1720, John Law’s Banque Royale. That experience allows us to see how this is likely to play out.
Introduction
There is a widespread assumption that commercial banks bear risk while central banks bear none. Folding notes are superior to bank deposits for this reason. It is commercial banks which fail, and central banks that rescue the ones worth rescuing. They are the lenders of last resort.
As such, their financial integrity goes unquestioned. Of course, we do not usually include central banks in emerging nations in this statement, but any risk is always perceived to be in their currencies rather than the institution. We know that the Reserve Bank of Zimbabwe can and does run some unconventional monetary policies, but you won’t hear the RBZ’s survival being questioned. It is generally assumed that in any nation a central bank that can issue its currency in unlimited quantities can never go bust, and that is why it is the currency that fails, and not the institution.
