Losses by central banks are nothing to fear

IF MONEY-LOSING banks are a source of concern, then surely losses by central banks—the bankers for banks—must be especially disconcerting. The tumbling value of assets held by the Bank of Japan and the Swiss National Bank seems a sure sign that central bankers have behaved recklessly and put their economies at risk. Anxiety about bond-buying in Germany, where on May 5th the constitutional court suggested that it might block the Bundesbank from participating in the European Central Bank’s asset-purchase programmes (see article), partly reflects such concerns. Central banks are not like private banks, though. Rather than reflecting financial weakness, their losses are a reminder of their odd institutional position.

How does a central bank incur a loss? Like private banks, they have balance-sheets. These consist of assets—such as government bonds—and liabilities, which include the interest-bearing reserve balances of private financial institutions, analogous to current accounts at high-street banks. A central bank makes a loss if the income it earns on its assets falls below the interest it pays out on its liabilities. A decline in the value of its assets can also place it in a hole, and in need of...