Central Bank Finances

BIS Papers No 71

BIS, 2013

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New economic research on central banks’ financial strength reveals how they handle increasingly volatile economies.

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The Bank for International Settlements (BIS) takes an important look at the roles of central banks in the volatile aftermath of the financial crisis of 2008. BIS economists David Archer and Paul Moser-Boehm assess various criteria to determine how central banks’ financial strength helps them to achieve their economic and political objectives. They also investigate the tools available to central bankers and policy makers. Their comprehensive report delves into the changes that pushed central banks into unexplored policy domains and that now constitute the new normal in international financial markets. The authors don’t offer absolute answers to such multifaceted issues as capital retention, “distribution asymmetries” and risk exposures. However, they do propose a sound framework that central banks and associated entities can use to evaluate their financial strength and monetary strategies. getAbstract considers this a significant report about the changing, increasingly complex work of central banks. It will help industry participants and finance professionals unravel erroneous public assumptions about a complicated but critically important subject.

Summary

Changing Roles for Central Banks

Central banking is hard work, and it has become even harder. The 2008 financial crisis and the global response to it pushed these institutions into the limelight. Circumstances forced central banks such as the US Federal Reserve, the Bank of England and the European Central Bank (ECB) to assume more complex and inherently riskier positions and responsibilities than ever before. Because of these “unprecedented policy actions” and their potential impact on the banks’ fiscal conditions, international observers are asking how significant a central bank’s financial strength is to its ability to fulfill its policy objectives. Furthermore, if financial strength is important in achieving policy goals, how should these banks define, create and express their financial soundness?

To assess a central bank’s roles and responsibilities, begin by evaluating how it performs its primary functions. Nations formed central banks to manage their money supply and monetary policies through such tools as interest rates and reserve requirements. Central banks also serve as “lenders of last resort” in an economic crisis. A central bank’s leading role is not...

About the Authors

David Archer is head of central banking studies at the Bank for International Settlements, where Paul Moser-Boehm is a senior economist.

David Archer and Paul Moser-Boehm

Central Bank Finances

BIS Papers No 71

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Changing Roles for Central Banks

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