1
$\begingroup$

Central banks typically pumps money into the system by :

  • lending out to private banks
  • buying govt bonds

But in both these cases won't the central bank get back more money when it ends it's position (ie., initial money along-with the interest) and in the end more money from the system would get accumulated with the central bank.

$\endgroup$
2
$\begingroup$

A minor point, but central banks also pay for operating expenses. So they have to spend some of the surplus on salaries, building maintenance, etc. And they also get more surplus by printing physical money.

However in most countries it is included within the charter of the central bank that any surplus left over at the end of some period is to be transferred to the government treasury. The government is then free to spend this surplus.

This is one of the reasons for the seperation of the central bank and the government. If a government had control of the bank it could be tempted to instruct the bank to create a surplus and then use said surplus to finance government expenditures. This is deemed undesirable as it inreases inflation.

Should a central bank somehow end up with a deficit rather then a surplus it falls to the treasury to help them out (if needed).

You can read about details in the FED's charter: https://www.federalreserve.gov/aboutthefed/section7.htm

The ECB also has a paper with some info on this. Point 2.1.:

Overview of profit distribution and loss coverage

In general terms, a central bank’s annual net profits (recognised positive and negative income, less operating costs) can either be passed on to shareholders (government and/or private sector) in the form of a dividend, or added to its financial reserves. In cases where a central bank has either both public and private ownership or only private ownership, the amount of profit that can be distributed to private shareholders is typically subject to a cap (ranging from 6% to 12% of the nominal value of the paid-up capital), while the remaining distributable profit, net of any transfers to equity (capital and reserves) goes to the government.

$\endgroup$
  • $\begingroup$ Interesting point. What about surpluses made by the ECB ? Could the answer be "yes" for the euro-zone ? $\endgroup$ – Alexis L. Jul 8 '16 at 13:04
  • $\begingroup$ I recall that the ECB's shareholders were liable to losses when the ECB bought Greek government bonds. I would imagine they also get profits should there be any but I could not find a source for that. $\endgroup$ – Giskard Jul 8 '16 at 13:36
  • $\begingroup$ Thanks for your answer. But, it's not just the surplus that I am asking about when the central bank ends it's position will it not get back the money intended to be supplied in the system and along-with it the surplus earned on that money (ie., money already present in the system). If this entire amount is then returned to the govt then it indirectly implies that the govt gets all the new printed currency. $\endgroup$ – Mike Jul 9 '16 at 5:12
  • $\begingroup$ @ralphsol It does get that money back, but if it would turn all income over to the government, not just the surplus, then the central bank would have no capital left and it would liquidate itself at the end of the year. To avoid this they only turn over the surplus, the rest is left with the bank to use next year. $\endgroup$ – Giskard Jul 9 '16 at 7:16
  • $\begingroup$ An example: The central bank buys bonds for \$100 and get \$110 at the end of the year. If this is the only thing they have done, then the \$10 dollar earning is surely transferred to the government. Furthermore, if new money was issued to pay the \$100 for the bond, that is also surplus, and at the end of the year it will be transferred to the government. But if the bank had the \$100 from the previous year, it is just capital, and not transferred at the end of this year either. $\endgroup$ – Giskard Jul 9 '16 at 7:20

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.