Can a Central Bank Lose Money?

How central banks can make losses when interest rates rise, why this does not bankrupt them, and the political questions it raises.

Central banks usually make profits, often passing them to their governments. But after the interest rate rises of 2022 and 2023, several major central banks began making large losses. How can that happen, and does it matter?

How central banks earn profits

Central banks earn income from their assets, such as government bonds, while paying little or nothing on banknotes. This profit from issuing money is called seigniorage. In most years, central banks transfer profits to their governments. The Reserve Bank of India, for example, pays a large annual dividend, called a surplus transfer, to the central government.

How losses arose

During quantitative easing, central banks bought large amounts of long-term bonds paying low interest rates. They paid for them by creating reserves. When inflation surged and rates rose sharply, central banks had to pay much higher interest on those reserves, while their bonds still paid low fixed rates. Their interest costs exceeded their interest income.

The U.S. Federal Reserve began making losses in 2022. Rather than asking for money, it records a deferred asset, which it will offset with future profits before resuming payments to the Treasury.
The Bank of England’s losses on its bond purchases are covered by the UK Treasury under an indemnity agreement.
Other central banks, such as the Swiss National Bank, reported large losses due to currency and market movements.

Does it matter?

A central bank cannot run out of its own currency, so it cannot go bankrupt in the usual sense. It can operate with negative equity. However, losses can:

Reduce payments to the government, affecting budgets.
Attract political criticism, which could threaten central bank independence.
Raise questions about the costs of quantitative easing.

Borrowing short, lending long

A central bank holds a bond paying 1.5 percent a year, funded by reserves on which it pays the policy rate. When the policy rate was near zero, this earned a profit. When the policy rate rises to 5 percent, the central bank pays 5 percent on reserves while earning 1.5 percent on the bond, losing 3.5 percent a year on that position.

Thinking central bank losses mean the bank will fail

Central banks can operate with losses and even negative equity because they issue their own currency. The real concerns are fiscal and political, not bankruptcy.

Key takeaways

Central banks usually earn seigniorage and transfer profits to governments.
Rate rises after quantitative easing caused losses at several major central banks.
The Fed records losses as a deferred asset; the UK Treasury covers Bank of England losses.
Losses do not bankrupt central banks but raise fiscal and political questions.