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The yardstick for central bank "health" and/or "credibility" can be nebulous at times. It is sometimes argued that a balance-sheet assessment only does not capture the nuance of a central bank because the central bank's true "asset" is its ability to print money. But by the same token, central banks are now becoming bigger buyers of certain securities. In the case of Japan, the BOJ has over 50% of some maturities. The point being that when a central bank is expected to play a meaningful role when crises emerge, then it's "liabilities" will also be incalculable.

For commercial banks, equity serves as a quasi-clawback provision as it allows creditors to get repaid should the bank encounter extreme solvency issues. But for central banks, I'm not sure what "equity" really signals to anybody.

Question

At what point does negative accounting equity register on the broader macroprudential radar and why? I suppose that even though one cannot have a "run" on a central bank, it could be seen as a BOP or FX crisis.

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  • $\begingroup$ As I see it, central bank assets minus liabilities is some measure of how much liquidity has been injected into the economy. $\endgroup$
    – user253751
    Nov 18, 2022 at 10:35

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At what point does negative accounting equity register on the broader macroprudential radar and why?

It does not. The reason why is that negative equity does not pose any macroeconomic risk as such it cannot be registered by the 'macroprudential radar'. As argued by David Archer and Paul Moser-Boehm (2013):

Central banks are not commercial banks. They do not seek profits. Nor do they face the same financial constraints as private institutions. In practical terms, this means that most central banks could lose enough money to drive their equity negative, and still continue to function completely successfully. For most central banks, one would have to go far to construct a scenario under which they might have to compromise their policy objectives in order to keep paying their bills.

Negative equity simply does not pose any macroprudential risks whatsoever. There are political risks, or to be more precise risks of politicization of central bank, but no macroprudential risks (Stella 1997).

I suppose that even though one cannot have a "run" on a central bank, it could be seen as a BOP or FX crisis.

Central bank does not need equity for FX intervention, and central bank equity does not matter for BOP as central bank equity does not constrain the quantity of CB reserves.

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