Post-QE bond losses rising reality for central banks — BIS

Post-QE bond losses rising reality for central banks — BIS
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LONDON (Feb 7): Central banks face mounting losses on the trillions of dollars of bonds they bought in the past 15 years of rolling crises, a paper from the Bank for International Settlements (BIS) said, warning that the deficits could leave them open to political attack.

Having rapidly raised interest rates to fight inflation, the Federal Reserve and its European peers are now making huge interest payments to commercial banks on deposits they themselves created with their massive support efforts, which were known as quantitative easing (QE).

The Fed's cumulative loss from its quantitative easing now stands at almost US$26 billion. The Swiss National Bank made a loss of 132 billion Swiss francs (US$143 billion) last year, while the European Central Bank (ECB) now pays 2.5% interest on four trillion euros that commercial banks got for free during the crisis years.

The US Treasury will not need to worry about bailing out the Fed, which can simply defer any loss. But the Treasury will still be missing the US$50 billion to US$100 billion the Fed's bond profits used to provide each year.

The ECB and a number of national central banks in Europe have issued warnings, though. Britain's government, which has received more than 120 billion pounds in profits from the Bank of England since 2009, has already set aside 11 billion pounds for the central bank.

The BIS's paper said that when bailouts were required they risked raising the ire of taxpayers and politicians who then took aim at central banks' independence.

"If there is macroeconomic mismanagement and the state lacks credibility, losses may erode the central bank's standing, which may jeopardise its independence and could even lead to the currency's collapse," the paper said, referring to the worst-case scenario.

There were dozens of past examples from developing economies, including Mexico, Chile, the Czech Republic and Israel, where central banks can operate without major difficulties in negative equity, it said.

To head off any political barbs, however, the banks should communicate that the measures that led to the losses were undertaken to ensure price and economic stability which has a long-term benefit.

"To maintain the public's trust and to preserve central bank legitimacy now and in the long run, stakeholders should appreciate that central banks' policy mandates come before profits," the paper said.