When a company tells its shareholders that it expects to incur €9 billion in losses over the next five years that would wipe out all of its provisions and equity, it usually leads to an existential crisis. The normal rules don’t seem to apply to the Belgian central bank.

The BNB’s warning – which included the cancellation of key dividend payments this year – caused its shares to drop nearly 18 per cent last week. But it still managed to reassure investors that its financial problems “will not question its stability”.

said the 172-year-old institution, which is one of 19 national central banks to subscribe to the euro and is the major shareholder in the euro. European Central Bank.

with central banks Around the world they are sharply raising interest rates to tackle spiraling inflation and liquidate their massive bond purchases, economists expect many of them to incur big losses as they now have to pay more interest to commercial banks than they earn from other regions.

Central banks across the eurozone will have to pay around €70 billion in interest on commercial bank deposits next year, estimates Frederic Ducrozet, head of macroeconomic research at Pictet Wealth Management. That amount is much larger than in recent years as a result of the European Central Bank’s aggressive monetary easing from 2014-21, when negative rates meant lenders paid to deposit money into the central bank.

Ducrozet warned that the scale of payments on deposits would drag many eurozone central banks into the red, adding that some “may face increasing political pressure to recapitalize.”

Some believe that this will only lead to “a storm in a teacup,” said Danske Bank strategist Piet Heines Christiansen, pointing out that central banks do not aim for profit and cannot go bankrupt when they have the ability to print money and earn revenue. On the production of the coin through a process called Seigniorage.

“It doesn’t matter economically because a central bank can do well with less capital, even negative capital,” said Erik Nielsen, chief economic advisor for Italy’s UniCredit Bank.

Several central banks have already fallen into negative stocks in the past without it causing major problems, including those in the Czech Republic, Sweden, Chile, Israel and Mexico.

However, others warn that increased losses may have many unwanted side effects. Most of the monetary authorities are nationalized. And part of its profits – including those of Belgium, which is 50 percent state-owned – was paid to the ministries of finance.

Thus, lower central bank profits will hurt public finances. If the losses are too great, they may need government bailouts that risk increasing political pressure and threatening their independence.

“It is difficult to say whether this will ultimately mean a loss of independence,” said Sandra Philippon, chief economist at Dutch bank ABN Amro. Of course, recapitalization from the states does not help [central banks] to be more independent. “

Over the past decade, central banks in the eurozone have made healthy profits, totaling around €300 billion between 2012 and 2021, thanks mainly to income on the bonds they bought during this period and negative interest earned on commercial bank deposits.

While a portion of those profits went to national governments, they also used a large portion to build up reserves that could absorb losses while loosening their ultra-loose monetary policies.

These reserves come into play since central banks start to raise interest rates sharply. The European Central Bank, for example, said that together with 19 national central banks in the eurozone, it had built up €116 billion of provisions and €116 billion of reserves and capital, adding that “our net equity is large enough to withstand potential shortfalls.”

Some central banks also suffer losses in the large bond portfolios acquired in recent years. The Reserve Bank of Australia recently announced an accounting loss of A$37 billion ($25 billion) in its pandemic bond purchase programme, leaving it with a negative equity position of A$12 billion.

The UK’s Office for Budget Responsibility estimated that the Bank of England would need to pay £133 billion from the government over the next five years to cover losses on its quantitative easing portfolio.

Some central banks also invested their own money in securities, exposing them to losses after their value declined. An extreme example is the Swiss National Bank, which warned Last October, it had already posted a record loss of 142.4 billion Swiss francs ($152 billion) in the first nine months of this year, mostly from losses on its investments from its foreign exchange reserves.

Major central banks, such as the European Central Bank and the US Federal Reserve, can deal with any negative equity by piling up “deferred assets” until they return to profitability, allowing them to avoid a government bailout.

However, such a scenario would be inconvenient, especially when the European Central Bank was likewise publicly criticize Other European central banks, such as the Czech National Bank, have negative equity. It will also come at a time of mounting Political criticism of politicians about the monetary policy response to rising inflation.

“Especially in a situation where central banks are trying hard to restore their credibility as inflation fighters, negative equity would be counterproductive,” said Carsten Brzeski, head of macro research at Dutch bank ING.