Central Bank Capital and Shareholder Relationship

53 Pages Posted: 10 Apr 2024 Last revised: 15 Apr 2024

See all articles by Matteo Bonetti

Matteo Bonetti

De Nederlandsche Bank

Dirk Broeders

De Nederlandsche Bank; Maastricht University

Damiaan Chen

University of Amsterdam

Daniel Dimitrov

University of Amsterdam; Tinbergen Institute; De Nederlandsche Bank - Financial Markets Division

Date Written: April 8, 2024

Abstract

In pursuing its mandate, a central bank assumes financial risks through its mon- etary policy operations. Central bank capital is a critical tool in mitigating these risks. We investigate the concept of central bank capital as a mechanism for risk- sharing with its shareholder. Adopting an option pricing framework, we explore the setting where the central bank commits to distributing dividends when its cap- ital is robust, while the shareholder may be called upon to recapitalize the bank during adverse economic conditions, with negative capital. Our analysis dissects the trade-offs inherent in these options, seeking a mutually beneficial agreement that disincentivizes deviation for either party. This equilibrium is essential for safe- guarding the independence and credibility of the central bank in executing monetary policy effectively.

Keywords: Capital; Central Bank, Contingent Claim Analysis, Risk Management, Shareholder, Stackelberg Games

JEL Classification: G13, G32, E58

Suggested Citation

Bonetti, Matteo and Broeders, Dirk and Chen, Damiaan and Dimitrov, Daniel, Central Bank Capital and Shareholder Relationship (April 8, 2024). De Nederlandsche Bank Working Paper No. 809/ April 2024, Available at SSRN: https://ssrn.com/abstract=4788392 or http://dx.doi.org/10.2139/ssrn.4788392

Matteo Bonetti (Contact Author)

De Nederlandsche Bank ( email )

P.O. Box 98
Amsterdam, 1000 AB
Netherlands

Dirk Broeders

De Nederlandsche Bank ( email )

P.O. Box 98
Amsterdam, 1000 AB
Netherlands

HOME PAGE: http://www.dnb.nl/en/research/personal-pages/dirk-broeders/

Maastricht University ( email )

P.O. Box 616
Maastricht, Limburg 6200MD
Netherlands

HOME PAGE: http://www.maastrichtuniversity.nl/about-um/faculties/school-business-and-economics

Damiaan Chen

University of Amsterdam ( email )

Spui 21
Amsterdam, 1018 WB
Netherlands

Daniel Dimitrov

University of Amsterdam ( email )

Spui 21
Amsterdam, 1018 WB
Netherlands

Tinbergen Institute

De Nederlandsche Bank - Financial Markets Division ( email )

P.O.B. 98
1000 AB Amsterdam
Netherlands

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
40
Abstract Views
178
PlumX Metrics