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Central bank capital management

Author

Listed:
  • Wessels, Paul

    (Head of Payment and Collateral Operations, De Nederlandsche Bank, The Netherlands)

  • Broeders, Dirk

    (Senior Financial Risk Manager, De Nederlandsche Bank, The Netherlands)

Abstract

This paper offers general guidelines for central bank capital management. Capital adequacy is important to be a credible, independent monetary authority over a medium-term horizon. Central banks, however, face several challenges in determining their capital adequacy. Firstly, the amount of capital only plays an auxiliary role in central banks' effectiveness given that they cannot default as long as they have the right to issue legal tender. Secondly, central banks face two types of financial risks: calculable risks from current exposures and latent risks from future exposures. These latent risks, in particular, are difficult to quantify because they stem from contingent policy measures such as quantitative easing and lending of last resort. It is argued that a central bank's target level of capital (1) can be calibrated with a confidence level that is lower than that used for commercial banks and (2) takes latent risks into account that are related to GDP or the size of the financial sector in the economy.

Suggested Citation

  • Wessels, Paul & Broeders, Dirk, 2023. "Central bank capital management," Journal of Risk Management in Financial Institutions, Henry Stewart Publications, vol. 16(3), pages 304-315, June.
    • Handle: RePEc:aza:rmfi00:y:2023:v:16:i:3:p:304-315
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    More about this item

    Keywords

    capital; capital management; central banks; latent risks; risk management;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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