Capitalizing Central Banks: A Net Worth Approach

Abstract

This paper provides a simple, quantitative, net worth-based, approach to assessing the need for central bank capital. It derives a concept of core capital (a function of the central bank`s operating expenditures and the carrying cost of its international reserves) as the minimum capital needed by a central bank to ensure the credibility of its inflation target. The approach is illustrated with the published accounts of three loss-making central banks and selected accounting entries for a broader sample of central banks. Policy implications are explored. In particular, the paper argues that central bank capitalizations cannot be automatic and require instead a broad policy debate.

Keywords: Central bank capital, international reserves, net worth

JEL Classification: E58, E52, H63