## 1. Central Bank Losses in a Group of Western Hemisphere Countries, 1987–2005

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---

### Introduction and scope
- Focus areas:
  - the financial structure of the central bank balance sheet; and
  - legal and institutional arrangements shaping central bank and government financial relations.
- Emphasis: importance of these relations for central bank financial independence.
- Analytical stance:
  - Evaluate the corporate financial structure of the central bank as a stand-alone entity for assessing monetary policy credibility of an independent central bank.
  - For sovereign debt sustainability or overall fiscal stance, consolidated state budget and balance sheet are appropriate.

### Observed neglect of central bank corporate finance
- Mainstream texts largely ignore central bank corporate finance (examples cited: Stiglitz and Tirole).
- Common rationales for ignoring central bank finances identified:
  - macroeconomically insignificant;
  - properly analyzed only within consolidated public sector accounts; or
  - irrelevant because of the central bank’s unlimited ability to create money.
- The paper challenges models that treat monetary policy choice as unconstrained by any intertemporal budget constraint.

### The increasing relevance of central bank financial strength and independence
- Historical profitability examples:
  - U.S. Federal Reserve system has made a profit every year since 1915.
  - De Nederlandsche Bank has made a profit every year save one since 1814.
- Factors increasing relevance:
  - Adoption of IFRS and requirement that foreign exchange revaluation changes be brought to the profit and loss account.
  - Adoption of mark-to-market and/or fair value accounting increasing recognized asset price volatility.
  - Accumulation of large volumes of foreign exchange reserves in absolute terms and as a proportion of central bank assets.
  - Increased balance-sheet leverage due to global rise in capital flows relative to central bank balance sheets.
  - Decline in inflation and consequent lower central bank income from the inflation tax.
  - Growth in central bank roles and potential contingent liabilities (lender-of-last-resort financing, sterilization expenditures).
- Empirical indicators and trends:
  - Figures document rising ratios of Net Foreign Assets to Central Bank Capital across 106 countries for 1991, 2001, and 2006.
  - Median Return on Average Assets in a sample of 91 central banks: 1995-99 = 1.66; 2000-04 = 1.25; (chart also displays 0.00).
  - Fed profits average about ¼ of one percent of GDP.
  - Profits/losses of the European Central Bank have remained less than 0.03 percent of Euro-area GDP in absolute value during its brief existence.

### Recognition of losses, accounting standards, and volatility
- IFRS consequence: foreign exchange revaluation changes must be brought to profit and loss, increasing observed volatility of central bank income and equity.
- Past practices (setting aside revaluation losses, opaque asset accounts) are being replaced by reflecting losses in profit and loss accounts and in equity.
- Mechanical profit-distribution rules designed for a less volatile environment can conflict with new accounting realities.

### Financial pressures, drivers of losses, and selected episodes
- Drivers of cash-flow losses and financial stress:
  - Issuance of central bank debt to sterilize local currency counterpart of foreign exchange purchases.
  - Exposure to revaluation losses if domestic currency appreciates against major reserve currencies.
- Selected adverse outcomes and country examples:
  - At least one historical case (the Philippines) where a central bank was placed into liquidation.
  - Central Bank of Costa Rica quote: “We, the central bank, have a negative net worth...and this remains our greatest challenge.”
  - Recent spikes/episodes noted in Dominican Republic (2003–05 period).
- Country and instrument magnitudes:
  - Uruguay: central bank losses averaged 3 percent of GDP in the late 1980s.
  - Chile: cost of the 1982 financial crisis to the state estimated at 33 percent of GDP; partial recapitalization in 1987 and transfers approved in 2006 of up to 0.5 percent of GDP per annum for a period of 5 years; first part: US$606 million received December 27, 2006.
  - Dominican Republic: central bank domestic debt amounts to 22 times central government domestic debt following a banking crisis containment effort.
  - Honduras and Nicaragua: ratios of central bank domestic debt to central government domestic debt are 2.4 and 1.4, respectively.
  - Nicaragua (Aug 2000–2001): Central Bank issued 20 percent of GDP in dollar-indexed domestic debt to resolve four bank failures; these bonds subsequently had to be restructured.
  - Monetary stabilization/debt instruments (selected central banks, end-2005 and other dates):
    - Central Bank of Korea: monetary stabilization bonds account for 57 percent of liabilities (end-2005).
    - Bank Indonesia certificates: 19 percent (end-2005 context).
    - Bank of Jamaica certificates of deposit: 61 percent (for years after 2002; note excludes Bank of Jamaica Special Issue Bond).

### Regional aggregate indicators (Western Hemisphere sample, 1987–2005, Table 1 highlights)
- Mean central bank results (selected years): 1987 = -2.7; 1988 = -2.7; 1989 = -3.0; 1990 = -2.0; 1991 = -1.4; 1992 = -1.2; 1993 = -0.7; 1994 = -0.6; 1995 = -0.9; 1996 = -0.5; 1997 = -0.5; 1998 = -0.5; 1999 = -0.5; 2000 = -0.3; 2001 = -0.5; 2002 = -0.7; 2003 = -0.8; 2004 = -0.8; 2005 = -1.0.
- Median central bank results (selected years): 1987 = -2.8; 1988 = -2.9; 1989 = -1.8; 1990 = -2.1; 1991 = -1.4; 1992 = -1.1; 1993 = -0.4; 1994 = -0.6; 1995 = -0.6; 1996 = -0.6; 1997 = -0.6; 1998 = -0.3; 1999 = -0.3; 2000 = -0.2; 2001 = -0.4; 2002 = -0.6; 2003 = -0.7; 2004 = -0.8; 2005 = -0.8.

### Is central bank financial independence a sensible concept?
- Key distinction:
  - Technical insolvency: ability to meet nominal obligations via currency creation.
  - Policy insolvency: ability to meet policy commitments given financial constraints and fiscal backing.
- Views asserting financial situation is irrelevant: creditors at no risk because central bank can create currency; liabilities backed by state taxing power (summarized quotes from Greenspan, Meyer, Goodhart, Buiter).
- Counterarguments:
  - Policy effectiveness depends on credibility and fiscal backing; absence of fiscal anchor limits ability to commit to an inflation target (Sims).
  - Actions to avoid technical insolvency (money creation) may undermine policy commitments and credibility in real terms.
  - Parliamentary or treasury actions (suspension of convertibility or failure to recapitalize) historically determine outcomes—legal and institutional arrangements matter.

### Governance, market, and conflict-of-interest issues
- Central bank acting as manager and obligor of sovereign domestic debt creates conflicts (raising rates to control inflation increases sovereign debt service within same institution).
- Central bank debt issuance may not be subject to legislative approval and may be facilitated by operational links with domestic banks.
- Providing central bank securities to insolvent banking systems can create systemic dependency and illusory market deepening.

### Legal provisions review (Section IV and Appendix 1)
- Review of 135 central bank laws summarized in Appendix 1 (Table 4).
- Two angles examined:
  - General provisions treating relations with fiscal authorities.
  - Specific sections dealing with central bank financial structure and mechanisms for resolving capital deficiencies.
- Findings: diversity of legal views worldwide; a bi-modal distribution between explicit state guarantees and explicit mutual non-liability.

### Diversity of legal arrangements on state backing of central banks (representative excerpts)
- Examples where state explicitly guarantees central bank obligations:
  - El Salvador: “All the obligations of the Central Reserve Bank of El Salvador shall be assumed by the State through the Ministry of Finance...”
  - Croatia: “obligations of the Croatian National Bank shall be guaranteed by the Republic of Croatia.”
  - Iceland: “All obligations of the Central Bank are guaranteed by the State Treasury.”
- Examples where mutual non-liability is explicit:
  - Lithuania: “The State of Lithuania shall not be liable for the obligations of the Bank of Lithuania, and the Bank of Lithuania shall not be liable for the obligations of the State of Lithuania.”
  - Tajikistan: “The Republic of Tajikistan shall not be liable for the obligations of the National Bank of Tajikistan, except for those assumed with consent...”
- Implication: “It cannot be assumed that the state is legally responsible for the central bank’s obligations.”

### Coping with central bank losses or capital insufficiency — legal provisions and practices
- Remedies in law include:
  - offsets from reserves and capital;
  - transfers from government budgetary resources within prescribed timeframes (examples: “within two months”, “within a maximum period of 60 days”);
  - issuance/transfer of government securities (negotiable or non-negotiable, interest-bearing or non-interest-bearing);
  - explicit government guarantees;
  - provisions allowing temporary uncovered losses to be offset by subsequent profits.
- Pre-authorized (automatic) recapitalization examples:
  - Kenya: net losses in excess of general reserve fund “shall be charged upon and paid out of the Consolidated Fund without further appropriation than this Act.”
  - New Zealand: Minister shall “without further appropriation, pay to the Bank ... the amount of any exchange losses ...”
- Use of non-negotiable, non-interest-bearing government securities is common (examples: Fiji, Malawi, Namibia, Papua New Guinea).
- Government-issued securities serviced out of future central bank profits provide no immediate cash inflow (examples: United Arab Emirates, Rwanda).

### Empirical realities: do treasuries act as guarantors in practice?
- Basic conclusion: “The basic answer to this question is frequently no, at least not on a timely basis.”
- Reasons recapitalization may fail or be ineffective:
  - States do not always fulfill legal obligations (examples referenced: Dominican Republic and Nicaragua).
  - Legislative appropriation requirements delay or prevent transfers (example: Guatemala).
  - Treasuries may issue virtually valueless obligations (examples: Honduras recapitalized with 50-year non-remunerated bonds; 1997 bond nominal 5.4 billion lempira = 1.1 percent of 1996 GDP; discounted value using average return on Honduran government bonds 1997–2003 yields 0.0006 percent of GDP).
  - Securities payable from central bank retained earnings provide no immediate cash and may not qualify as an IFRS asset.
- Profit transfer rules often asymmetric: many laws mandate profit transfers to treasury but are silent on losses, making banks prone to decapitalization.

### Accounting practices that can mask losses
- Non-implementation of IFRS fair valuation allows non-recognition of losses (e.g., gold at cost of acquisition).
- Use of revaluation or adjustment accounts that do not impact equity.
- Legal constraints to maintain statutory nominal capital can lead to creation of “claims on government” to balance sheets rather than real capital reductions (example term: Central Bank of Ecuador’s “perdidas activadas”).
- Historical examples: National Bank of Hungary revaluation losses by end-1995 reached 37 percent of central bank assets while still transferring profit to Ministry of Finance; comparable peaks: South Africa (2003) 28 percent of assets; Peru (1988) 25 percent of assets.

### Stages or layers of central bank financial independence and recapitalization mechanisms
- Three-stage framework proposed:
  - Stage 1: balance sheet capital on hand; adequate treasury/central bank fiscal relations; restriction of quasi-fiscal operations.
  - Stage 2: legislated pre-authorization of recapitalization under certain circumstances (technical decision by treasury activates without further legislative appropriation).
  - Stage 3: legislative requirement that budgetary authority be sought for recapitalization under certain circumstances (requires treasury consent and legislative appropriation).
- Country practices:
  - U.S. and Canada: balance sheet strength eliminates need for stages 2 and 3 considerations.
  - Stage 2 elements observed in Malawi, New Zealand and Kenya.
  - Many countries operate a stage 3 solution.
- Technical and political constraints: “There is no agreed technical trigger indicating central bank capital inadequacy—nor can there be.” The appropriate degree of financial strength is policy-dependent and political.

### Preserving central bank financial independence — policy implications and options
- Key policy recommendations and options:
  - Limit or prohibit quasi-fiscal operations that expose central bank capital to systemic financial interventions (example: Peru’s 1992 law).
  - Design legal and institutional arrangements that:
    - ensure clarity on circumstances and instruments for recapitalization;
    - where possible, provide legislatively pre-authorized recapitalization mechanisms to avoid protracted legislative approval delays (Stage 2);
    - establish mechanisms to suspend profit transfers or condition transfers on balance-sheet adequacy.
  - Ensure accounting practices reflect economic reality (consider implementation of fair market valuation under IFRS and transparent treatment of revaluation accounts).
- Trade-offs:
  - Prohibiting crisis-support activities preserves independence but may limit crisis response capability.
  - Pre-authorized recapitalization reduces delay risk but requires political willingness to delegate contingent budgetary authority.

### Appendix I — summary of legal provisions (representative excerpts)
- The appendix documents explicit legal provisions across jurisdictions determining whether the state must cover central bank losses or vice versa.
- Remedies and arrangements vary: reserve application; time-bound government transfers; issuance of Treasury Bills or bonds with diverse maturities and interest terms; explicit guarantees; temporary uncovered losses offset by later profits.
- Representative country excerpts preserve original legal language (Argentina, Armenia, Belgium, Bosnia and Herzegovina, Cape Verde, China, Congo D.R., Croatia, Dominican Republic, El Salvador, Estonia, ECB, Fiji, Finland, Ghana, Georgia, Germany, Guatemala, Iceland, Jordan, Kazakhstan, Kenya, etc.).
- Notable legal timing or terms examples:
  - Bosnia and Herzegovina: Ministry must, within two months, provide Convertible Marka necessary to remedy a deficit shown on quarterly pro-forma balance sheet.
  - Cape Verde: Government shall deliver funds or negotiable instruments within a maximum period of 60 days.
  - Dominican Republic Article 82: government will fully cover cumulative deficit either by issuing bonds in local currency with maturity of at least fifty (50) years, or by allocating funds from long-term international financing; benchmark interest rate up to 2 percent, interest starts to accrue ten (10) years after date of issue; transfer within one year of law effect.
  - Guatemala: Ministry must include uncovered deficit in following year budget and provide Treasury bills or other instruments “which shall yield interest at market rates and be negotiable.”
  - Jordan: Government payment to cover deficiency “within the first three months following the end of the financial year.”
  - Oman: deficiency shall be a liability of the Government and paid within 90 days.
  - Venezuela: if insufficient balances, Republic shall make contributions by allocating corresponding credits in the budget for the fiscal year following determination; if fiscal accounts do not allow, National Assembly shall authorize special issue of national public debt securities under market conditions and maturity not exceeding five (5) years.

*Source: _wp0837 - 1. Central Bank Losses in a Group of Western Hemisphere Countries, 1987–2005 (excerpts provided).*

### 1. Central Bank Losses in a Group of Western Hemisphere Countries, 1987–2005...............13

### 1. Central Bank Losses in a Group of Western Hemisphere Countries, 1987–2005

### Introduction and scope
- The paper discusses issues in "central bank finance," with particular focus on:
  - the financial structure of the central bank balance sheet; and
  - legal and institutional arrangements shaping central bank and government financial relations.
- Emphasis is placed on the importance of those relations for central bank financial independence.

### Observed neglect of central bank corporate finance
- The corporate financial structure of central banks has received little explicit attention in recent decades, apart from debate around the European Central Bank.
- Evidence of neglect in mainstream texts cited:
  - Stiglitz’s "Economics of the Public Sector" (second edition) has one reference to "central bank" in a footnote on page 26.
  - Tirole’s "The Theory of Corporate Finance" yields no mention of central banks.

### Common rationales for ignoring central bank finances (as identified by the paper)
- Central bank finances are considered by some to be:
  - macroeconomically insignificant;
  - properly analyzed only within consolidated public sector accounts; or
  - irrelevant because of the central bank’s unlimited ability to create money.
- The paper indicates each of these rationales will be considered in turn and challenges the dominant modeling tendency that treats monetary policy choice (money supply or interest rate) as unconstrained by any requirement that the central bank meet an intertemporal budget constraint.

### Paper’s principal view and analytical stance
- The paper argues it is necessary to evaluate the corporate financial structure of the central bank as a stand-alone entity, particularly when evaluating the monetary policy credibility of an independent central bank.
- For other analytical purposes (for example, evaluating sovereign debt sustainability or the overall fiscal stance), the paper accepts that the consolidated state budget and balance sheet—amalgamating treasury and central bank assets, liabilities, and income statement—are appropriate focuses of attention.

### Controversy and structure of the paper
- The concept of central bank financial independence and the appropriate analytical framing are acknowledged as controversial.
- The paper previews its organization:
  - Section II discusses reasons for increasing interest in central bank finance in recent years.
  - Section III reviews the controversy surrounding central bank financial independence.

*Source: _wp0837 - 1. Central Bank Losses in a Group of Western Hemisphere Countries, 1987–2005 (excerpts provided).*

### Section IV considers the results of a review of legal provisions pertaining to these questions;

### _wp0837 - Section IV considers the results of a review of legal provisions pertaining to these questions;

### The increasing relevance of central bank financial strength and independence
- Historical profitability examples:
  - The U.S. Federal Reserve system has made a profit every year since 1915.
  - De Nederlandsche Bank has made a profit every year save one since 1814.
- Factors increasing the relevance of central bank financial strength:
  - Greater financial transparency and adoption of corporate accounting standards (IFRS), including the requirement that foreign exchange revaluation changes be brought to the profit and loss account.
  - Adoption of mark-to-market and/or fair value accounting leading to more frequent recognition of asset price volatility.
  - Accumulation of large volumes of foreign exchange reserves in absolute terms and as a proportion of central bank assets, notably in countries with current and capital account surpluses (energy exporters and high real growth exporters in Asia).
  - Increased balance-sheet leverage due to the global rise in capital flows relative to central bank balance sheets.
  - Decline in inflation globally and consequent lower central bank income from the inflation tax, reduction in unremunerated reserve requirements, and reduced taxation of the financial system.
  - Growth in central bank roles and potential contingent liabilities from domestic and international financial markets, lender-of-last-resort financing, and rising sterilization expenditures.
- Empirical indicators and trends:
  - Figures presented (Figures 1 and 2) document rising ratios of Net Foreign Assets to Central Bank Capital across 106 countries for 1991, 2001, and 2006.
  - Figure 3 reports Median Return on Average Assets in a sample of 91 central banks: 1995-99 = 1.66; 2000-04 = 1.25; (chart also displays 0.00).
  - Fed and major central bank metrics:
    - Fed profits average about ¼ of one percent of GDP.
    - Profits/losses of the European Central Bank have remained less than 0.03 percent of Euro-area GDP in absolute value during its brief existence.

### Recognition of losses, accounting standards, and volatility
- IFRS consequence:
  - Requirement to bring foreign exchange revaluation changes to profit and loss increases observed volatility of central bank income and equity.
- Asset revaluation and loss recognition:
  - Past practices of setting aside revaluation losses or using opaque asset accounts are being replaced by reflecting these losses in profit and loss accounts and in equity.
  - Mechanical profit-distribution rules designed for a less volatile environment can conflict with new accounting realities, presenting corporate finance challenges for central banks.

### Financial pressures and macroeconomic implications
- Drivers of cash-flow losses and financial stress:
  - Issuance of central bank debt to sterilize local currency counterpart of foreign exchange purchases.
  - Exposure to revaluation losses if domestic currency appreciates against major reserve currencies.
- Selected adverse outcomes and country examples:
  - Central banks unable to meet basic functions (including supply of banknotes) owing to financial distress; at least one case (the Philippines) placed into liquidation historically.
  - Central Bank of Costa Rica quote: “We, the central bank, have a negative net worth...and this remains our greatest challenge.” (Francisco de Paula Gutierrez, Central Banking, Vol. XV, No. 4, May 2005, page 82.)
  - Recent spikes and episodes of central bank losses noted in countries such as the Dominican Republic (example cited for the 2003–05 period).
- Cross-border and historical pressures:
  - Globalization, financial innovation, and ease of cross-border transactions have reduced central banks’ capacity to impose taxes on the regulated financial sector and contributed to lower inflation—factors that reduce seigniorage.

### Is central bank financial independence a sensible concept?
- Distinction emphasized:
  - Technical insolvency (ability to meet nominal obligations via currency creation) vs. policy insolvency (ability to meet policy commitments given financial constraints).
- Views asserting financial situation is irrelevant:
  - Argument that central banks can create currency and thus creditors are at no risk; central bank liabilities are backed by the state’s taxing power (quotes from Greenspan, Meyer, Goodhart, Buiter summarized in the source).
  - U.S. General Accounting Office finding: “We found no widely accepted, analytically based criteria to show whether a central bank needs capital as a cushion against losses or how the level of such an account should be determined.”
- Counterarguments and practical constraints:
  - Policy effectiveness depends on credibility and fiscal backing; absence of a fiscal anchor limits the ability to commit to an inflation target (Sims).
  - Actions required to avoid technical insolvency (e.g., money creation) may undermine policy commitments and credibility in real terms.
  - Historical episodes show that parliamentary or treasury actions (suspension of convertibility or failure to recapitalize) determine outcomes; hence legal and institutional arrangements matter over meaningful time horizons.

### Macro and country-specific evidence of financial distress
- Selected empirical magnitudes and episodes:
  - Uruguay: central bank losses averaged 3 percent of GDP in the late 1980s.
  - Chile: cost of the 1982 financial crisis to the state estimated at 33 percent of GDP; partial recapitalization in 1987 and further transfers approved in 2006 of up to 0.5 percent of GDP per annum for a period of 5 years; first part of this partial recapitalization: US$606 million received December 27, 2006.
  - Dominican Republic: central bank domestic debt amounts to 22 times central government domestic debt following a banking crisis containment effort.
  - Honduras and Nicaragua: ratios of central bank domestic debt to central government domestic debt are 2.4 and 1.4, respectively.
  - Nicaragua: during August 2000 to 2001 the Central Bank issued 20 percent of GDP in dollar-indexed domestic debt to resolve four bank failures; these bonds subsequently had to be restructured.
  - Monetary stabilization/debt instruments at selected central banks (end-2005 and other dates):
    - Central Bank of Korea: monetary stabilization bonds account for 57 percent of liabilities (end-2005).
    - Bank Indonesia certificates: 19 percent (date specified as end-2005 context).
    - Bank of Jamaica certificates of deposit: 61 percent (for years after 2002, note in source: only includes Bank of Jamaica cash losses, excluding Bank of Jamaica Special Issue Bond).
- Regional aggregate indicators (Western Hemisphere sample, 1987–2005, Table 1 highlights):
  - Mean central bank results (selected years from Table 1): 1987 = -2.7; 1988 = -2.7; 1989 = -3.0; 1990 = -2.0; 1991 = -1.4; 1992 = -1.2; 1993 = -0.7; 1994 = -0.6; 1995 = -0.9; 1996 = -0.5; 1997 = -0.5; 1998 = -0.5; 1999 = -0.5; 2000 = -0.3; 2001 = -0.5; 2002 = -0.7; 2003 = -0.8; 2004 = -0.8; 2005 = -1.0.
  - Median central bank results (selected years from Table 1): 1987 = -2.8; 1988 = -2.9; 1989 = -1.8; 1990 = -2.1; 1991 = -1.4; 1992 = -1.1; 1993 = -0.4; 1994 = -0.6; 1995 = -0.6; 1996 = -0.6; 1997 = -0.6; 1998 = -0.3; 1999 = -0.3; 2000 = -0.2; 2001 = -0.4; 2002 = -0.6; 2003 = -0.7; 2004 = -0.8; 2005 = -0.8.
- Governance, market, and conflict-of-interest issues:
  - In many countries the central bank acts as both manager and obligor of sovereign domestic debt, creating internal conflicts of interest (raising rates to control inflation increases sovereign debt service within the same institution).
  - Central bank debt issuance may not be subject to legislative approval and may be facilitated by operational links with domestic banks, complicating governance.
  - Provision of central bank securities to insolvent banking systems can produce an illusory deepening of markets and create systemic dependency.

### Conceptual and policy implications
- Key analytical point:
  - Distinguish technical insolvency (nominal ability to meet obligations via currency creation) from policy insolvency (ability to pursue credible policy commitments in real terms given fiscal/backing constraints).
- Policy-relevant observations:
  - Legal and institutional arrangements that define fiscal-backstop responsibilities and clarify the financial relationship between treasury and central bank are crucial to safeguard policy credibility.
  - The presence or absence of an implicit or explicit fiscal backstop matters greatly in practice—especially in countries that have experienced banking crises and quasi-fiscal operations that weakened central bank balance sheets.
  - Increased transparency, accounting reforms (IFRS, fair-value accounting), and careful design of profit-distribution rules are necessary to manage volatility and preserve central bank financial independence.

### Legal provisions and the next step
- Scope of review introduced in Section IV:
  - The analysis will examine whether legislation explicitly notes government responsibility for central bank financial liabilities and vice versa.
  - Two angles of examination:
    - General provisions in legislation treating relations with fiscal authorities.
    - Specific sections of law dealing with central bank financial structure and mechanisms for resolving capital deficiencies.
  - Findings are based on a review of 135 central bank laws and are summarized in Appendix 1 (Table 4) of the source document.

*Source: _wp0837 - Section IV considers the results of a review of legal provisions pertaining to these questions; (PDF chapter/section).*

### Appendix 1 shows that there is a diversity of legal views world wide with, in particular, a

### _wp0837 - Appendix 1 shows that there is a diversity of legal views world wide with, in particular, a

### Diversity of legal arrangements on state backing of central banks
- Legal regimes show a bi-modal distribution: cases where the treasury explicitly stands behind the central bank versus cases where the law explicitly separates liabilities.
- Examples where the state guarantees central bank obligations:
  - El Salvador: “All the obligations of the Central Reserve Bank of El Salvador shall be assumed by the State through the Ministry of Finance, which may offset them against obligations existing in its favor.”
  - Croatia: “obligations of the Croatian National Bank shall be guaranteed by the Republic of Croatia.”
  - Iceland: the Act on the Central Bank of Iceland states that “All obligations of the Central Bank are guaranteed by the State Treasury.”
- Examples where mutual non-liability is explicit:
  - Lithuania: “The State of Lithuania shall not be liable for the obligations of the Bank of Lithuania, and the Bank of Lithuania shall not be liable for the obligations of the State of Lithuania.”
  - Tajikistan: “The Republic of Tajikistan shall not be liable for the obligations of the National Bank of Tajikistan, except for those assumed with consent of the Madjlisi Oli of the Republic of Tajikistan or the President of the Republic of Tajikistan.”
- Historical and regional patterns:
  - Laws in Estonia, Latvia, Lithuania, Russia and other former Soviet states commonly express non-liability, possibly reflecting laws from a similar era and shared political/economic realities after the Soviet Union’s dissolution.
- Implication:
  - “It cannot be assumed that the state is legally responsible for the central bank’s obligations,” implying independent financial strength of the central bank matters for fulfilling its mandate.

### Coping with central bank losses or capital insufficiency — legal provisions and practices
- Many central bank laws include provisions for addressing losses or capital shortfalls, with varying specificity and types of remedies.
- General statutory clauses:
  - Kuwait: “If the General Reserve Fund, in any years, is insufficient to meet the losses of the Bank, or if it can not be used to meet the losses, the Government shall cover the deficit.”
  - Bank of Korea Act: “Any loss incurred by the Bank of Korea during any fiscal year shall be offset from the reserves and, should these be insufficient, the deficiency shall be made-up by the Government in accordance with the Budget and Accounts Act.”
- Pre-authorized (automatic) recapitalization examples:
  - Central Bank of Kenya Act: “The amount of any net losses of the Bank in any financial year which is in excess of the sums standing to the credit of the general reserve fund of the Bank shall be charged upon and paid out of the Consolidated Fund without further appropriation than this Act.”
  - Reserve Bank of New Zealand Act: Minister shall “without further appropriation, pay to the Bank out of the Crown Bank Account the amount of any exchange losses (whether realized or unrealized) incurred by the Bank as a result of dealing in foreign exchange under sections 17 and 18 of this Act.”
- Specific transfer types and timing can matter:
  - Cape Verde: government must deliver funds or negotiable instruments within a maximum period of 60 days to make up deficits, on market-determined terms and exchange rates.
- Use of non-negotiable, non-interest-bearing government securities as recapitalization:
  - Fiji: transfer of “non-negotiable non-interest bearing securities issued by the Government ...for the purpose of preserving the paid-up capital from any impairment...”
  - Malawi: devaluation losses “shall be covered by promissory notes of the government on such terms and conditions as shall be agreed upon between the Minister and the Bank.”
  - Namibia: revaluation losses to be covered by “...non-negotiable securities to the extent of the deficiency, on such terms and conditions as the Minister and the Board may agree upon.”
  - Papua New Guinea: Minister may issue “non-interest bearing non-negotiable notes” up to amounts paid by the Minister to the Central Bank out of the Consolidated Revenue Fund.
- Government-issued securities serviced out of future central bank profits:
  - United Arab Emirates: Government shall cover net debit balance by issuing “non-interest bearing, negotiable Treasury Bonds, which shall in turn be returned out of any net profits realized in subsequent years.”
  - Rwanda: Government will issue “Treasury Bills not negotiable and non interest-bearing” refundable by deduction from Government share of Bank profits per an agreed schedule.
- Implication:
  - Legal forms of recapitalization vary widely and may provide little immediate real value or cash flow to the central bank.

### Empirical realities: do treasuries act as guarantors in practice?
- Basic conclusion: “The basic answer to this question is frequently no, at least not on a timely basis.”
- Reasons recapitalization may not occur in practice:
  - States do not always fulfill legal obligations (example referenced: Dominican Republic and Nicaragua).
  - Legislative approval requirements: recapitalization may require specific legislative appropriation, delaying or preventing transfers.
    - Guatemala: Minister must submit required recapitalization amount in the subsequent year’s budget request — cannot mandate future congressional appropriation regardless of amount or timing.
    - Venezuela (2001): If fiscal resources are insufficient, National Assembly shall authorize a special issue of national public debt under market conditions to recapitalize.
  - Treasuries may provide virtually valueless obligations (non-remunerated long-term debt) instead of liquid funds.
    - Central Bank of Honduras (BCH) recapitalized three times with non-remunerated 50-year bonds; 1997 bond nominal 5.4 billion lempira = 1.1 percent of 1996 GDP; discounted value using average return on Honduran government bonds 1997–2003 yields 0.0006 percent of GDP.
  - Securities whose debt service is payable from central bank retained earnings provide no immediate cash inflow and may not qualify as an IFRS asset.
- Profit transfer rules and asymmetric treatment of revaluation gains/losses:
  - Many central banks transfer a mechanical proportion of profit to the treasury annually; laws often silent on losses, leaving banks prone to decapitalization.
  - No recognized standards for central bank capital; Basel risk-weighted asset to capital ratio is not applied.
  - Example: Netherlands amended central bank dividend policy because revaluation losses were not offset by treasury coverage.
- Accounting and balance sheet practices that sustain apparent positive capital despite losses:
  - Non-implementation of IFRS fair valuation allows non-recognition of losses via historical cost accounting (e.g., gold at cost of acquisition).
  - Use of revaluation or adjustment accounts that do not impact equity.
  - Legal constraints forcing maintenance of a statutory nominal capital can lead to creation of dubious “assets” (claims on government) to balance the sheet rather than lowering capital below the legal minimum.
    - Example term: Central Bank of Ecuador’s “perdidas activadas” (“assetized losses”).
  - Historical example: National Bank of Hungary (NBH) before recapitalization — revaluation losses by end-1995 reached 37 percent of central bank assets; NBH continued transferring profit to the Ministry of Finance despite large revaluation losses.
  - Comparable peaks in revaluation accounts: South Africa (2003) 28 percent of assets; Peru (1988) 25 percent of assets.

### Stages or layers of central bank financial independence and recapitalization mechanisms
- Proposed three-stage framework:
  - Stage 1: Balance sheet capital on hand; adequate treasury/central bank fiscal relations established; restriction of quasi-fiscal operations.
  - Stage 2: Legislated pre-authorization of recapitalization under certain circumstances (technical decision by treasury activates without further legislative appropriation).
  - Stage 3: Legislative requirements that budgetary authority be sought for recapitalization under certain circumstances (requires treasury consent and legislative appropriation).
- Country practices:
  - U.S. and Canada: balance sheet strength eliminates need for stages 2 and 3 considerations.
  - Stage 2 elements observed in Malawi, New Zealand and Kenya.
  - Many countries operate a stage 3 solution; some have mechanisms to suspend profit transfers when equity is negative or negotiate profit transfers with the Ministry of Finance.
- Technical and political constraints:
  - “There is no agreed technical trigger indicating central bank capital inadequacy—nor can there be.”
  - The appropriate degree of central bank financial strength is policy-dependent and political; institutional design can help preserve it once an appropriate level or range is determined.

### Preserving central bank financial independence — policy implications and options
- Key policy considerations:
  - Limit or prohibit quasi-fiscal operations that expose central bank capital to systemic financial interventions to preserve independence (example: Peru’s 1992 law banning activities associated with late-1980s hyperinflation).
  - Design legal and institutional arrangements that:
    - Ensure clarity on circumstances and instruments for recapitalization.
    - Where possible, provide legislatively pre-authorized recapitalization mechanisms to avoid protracted legislative approval delays (Stage 2).
    - Establish mechanisms to suspend profit transfers or condition transfers on balance-sheet adequacy.
  - Ensure accounting practices reflect economic reality (consider implementation of fair market valuation under IFRS and transparent treatment of revaluation accounts).
- Trade-offs:
  - Prohibiting central bank crisis-support activities preserves financial independence but may limit the central bank’s ability to respond to systemic crises.
  - Pre-authorized recapitalization (Stage 2) reduces delay risk but requires political willingness to delegate budgetary authority contingent on technical judgments.

*Source: _wp0837 - Appendix 1 shows that there is a diversity of legal views world wide with, in particular, a (IMF PDF content provided).*

### Appendix I.  Is the Central Bank Responsible

### Appendix I. Is the Central Bank Responsible for the State’s Obligations, and Vice Versa?

### Summary findings from the review of central bank legislation
- The table documents explicit legal provisions across jurisdictions that determine whether the state must cover central bank losses or vice versa.
- In countries indicated by an asterisk, either:
  - the state is explicitly free from the obligation to cover central bank losses; or
  - the state has the power to determine the terms of any compensation; or
  - such compensation is explicitly restrictive in some way (e.g., instruments provided are unremunerated, non-tradable, or both).
- Remedies for central bank losses in reviewed laws include:
  - application of prior reserves and capital;
  - transfers from government budgetary resources within prescribed timeframes (for example, "within two months" or "within a maximum period of 60 days");
  - issuance and transfer of government securities (e.g., Treasury Bills, bonds with specified maturities and interest terms, negotiable or non-negotiable, interest-bearing or non-interest-bearing);
  - explicit government guarantees of central bank obligations in some jurisdictions;
  - provisions allowing temporary uncovered losses to be offset by subsequent profits.

### Representative country provisions (selected excerpts preserving original text)
- Argentina *
  - Law No. 24,144 Charter of the Reserve Bank of the Argentine Republic, amended as of March 2002 — Article 38.
  - "Profits not capitalized will be utilized for the general reserve fund and the special reserve funds until those funds reach 50 percent of the capital of the bank. Once that level is reached, profits not retained in capital will be freely transferred to the account of the national government. Losses made by the bank in a given year will be charged against reserves that were constituted in previous years and if they are insufficient they will be charged against capital. In those cases, the bank board will be able to direct following year profits to reconstitute the level of capital and reserves that existed prior to the loss."
- Armenia *
  - The Republic of Armenia Law on the Central Bank of the Republic of Armenia, as of Dec. 28, 2005 — Article 1.
  - "The Central Bank and the Government of the Republic of Armenia shall bear no responsibilities for their respective obligations if not assumed such."
- Belgium *
  - Constitution of Belgium of 1970 — Section II - Share capital and rights attaching to shares. Article 10.
  - "Shareholders shall be liable for losses only to the extent of their interest in the Bank."
- Bosnia and Herzegovina
  - Law on the Central Bank of Bosnia and Herzegovina, amended as of March 7, 2003 — Article 29.
  - When a quarterly pro-forma balance sheet shows assets below liabilities and unimpaired authorized capital, or the net profit is insufficient to increase authorized capital to a level equivalent to five percent of the aggregate amount of monetary liabilities, "the Ministry responsible for the budget of Bosnia and Herzegovina shall, within two months after submission of that balance sheet to the Presidency of Bosnia and Herzegovina, provide Convertible Marka in such amount or amounts as shall be necessary to remedy this deficit."
  - Article 30: "No transfer, redemption or payment pursuant to Article 27 or 28 shall be made if, as a result thereof, in the opinion of the Governing Board of the Central Bank, the assets of the Central Bank would be less than the sum of its liabilities and unimpaired capital and reserves."
- Cape Verde
  - Organic Law of the Bank of Cape Verde of May 29, 2002 — Article 57.
  - If the Bank incurs a net loss: losses applied to General Reserve and unappropriated earnings; and "After the submission, by the Bank, of a report or statement confirming the balance of the cumulative losses, the Government shall deliver to the Bank, within a maximum period of 60 days, funds, negotiable instruments that are dated and on market-determined terms and conditions and at market-determined exchange rates, in the amount or amounts necessary to make up the deficit."
- China
  - Law of the People's Republic of China on the People's Bank of China (12/27/2003) — Articles 38–39.
  - Article 39: "The People's Bank of China [shall] surrender to the central budget its net profit each accounting year after making general provisions at a level set by the fiscal authority. Losses of the People's Bank of China shall be covered by fiscal appropriation from the central budget."
- Congo, Democratic Republic
  - Law 005/2002 of May 7, 2002 — Article 52.
  - "The government shall be liable for net losses sustained by the Bank if, at any time, the general reserve account and the special reserve accounts are depleted."
- Croatia
  - Law on the Croatian National Bank, new law enacted on April 5, 2001 — Article 53.
  - "(2) Obligations of the Croatian National Bank shall be guaranteed by the Republic of Croatia. (5) Any shortfall between income and expenditures that cannot be covered from general reserves shall be covered by the government budget."
- Dominican Republic *
  - Monetary and Financial Law No. 183-2 of December 3, 2002 — Articles 16 and 82.
  - Article 16: deficits covered first by General Reserve Fund; if insufficient, "the Government shall absorb the difference by a transfer of funds to the Central Bank or by issuing a Treasury Bill, whose maturity shall not exceed one (1) year, for the total amount of the difference, at an interest rate that may not be less than the market interest rate. This Treasury Bill may be broken up by the Central Bank in order to trade it on the secondary market. The Government shall include the payment of this Bill in its budget the year after it is issued."
  - Article 82: "The government will fully cover the cumulative deficit of the Central Bank ... either by issuing bonds in local currency with a maturity of at least fifty (50) years, or by allocating funds obtained by the government through long-term international financing, or through a combination of the two. In the case of bond issuance in local currency, the benchmark interest rate will be up to 2 percent, and interest will start to accrue ten (10) years after the date of issue. The government will transfer such bonds to the Central Bank, within one year from the date on which the Law comes into effect."
- El Salvador *
  - Charter of the Central Reserve Bank of El Salvador, Reforms of May 23, 1996, amended by the Monetary Integration Law of 2001 — Chapter II and Chapter XV.
  - Chapter II, Article 7: "In no case may transfers be made from the Bank’s capital and reserves, nor from the special funds, nor from its net profits or undistributed profits, in favor of public or private institutions." Exceptions and Article 6(c) allocation rules referenced.
  - Chapter XV, Article 100: "The State shall make up the Bank’s losses on the operations established in the Law on the Financial Recovery and Strengthening of Commercial Banks and Savings and Loans Associations, in a manner to be prescribed by the Ministry of Finance."
- Estonia *
  - Law on the Central Bank of the Republic of Estonia of 18 May 1993 — Article 3.
  - "Eesti Pank shall not to be held liable for the financial obligations of the State, nor shall the State be held liable for the financial obligations of Eesti Pank."
- European Central Bank
  - Protocol on the Statute of the European System of Central Banks and of the European Central Bank, amended as of June 1, 2004 — Article 33.2.
  - "In the event of a loss incurred by the ECB, the shortfall may be offset against the general reserve fund of the ECB and, if necessary, following a decision by the Governing Council, against the monetary income of the relevant financial year in proportion and up to the amounts allocated to the national central banks in accordance with Article 32.5."
- Fiji *
  - Chapter 210 - Reserve Bank of Fiji of 1973, amended as of 1998 — Sections on Capital and Revaluation Reserve Account.
  - Minister shall cause transfer to the Reserve Bank "non-negotiable non-interest bearing securities issued by the Government from time to time for such an amount as is necessary for the purpose of preserving the paid-up capital from any impairment whenever, in the opinion of the Board, the assets of the Reserve Bank are less than the sum of its liabilities and paid-up capital."
  - If Revaluation Reserve Account insufficient, "the Government shall cause to be transferred to the ownership of the Reserve Bank non-negotiable non-interest bearing securities issued by the Government to the extent of any deficiency."
- Finland *
  - No. 214/1998 Act on the Bank of Finland — Sections 8 and 21.
  - Section 21: "Half of the profit, following allocation of the monetary income that has accrued within the European System of Central Banks, shall be transferred to the reserve fund. The remaining profit shall be made available for use in accordance with the needs of the state. ... If the Bank’s annual accounts show a loss, the loss must be covered out of the reserve fund. If the reserve fund is insufficient to cover part of the loss, the uncovered part of the loss may be left temporarily uncovered. Any profits in subsequent years shall be used first to cover such uncovered losses."
- Ghana
  - Bank of Ghana Act, 2002 Act 612 — Revaluation Account and Liabilities for issue.
  - Where profits are insufficient to cover losses, "the Government shall cause to be issued to the Bank redeemable negotiable interest bearing securities to the extent of the deficiency." If currency cover assets are insufficient to meet redemption demands, "that deficiency shall be a charge on the Consolidated Fund."
- Georgia *
  - The Organic Law of Georgia on the National Bank, as amended - October 23, 2001 — Article 3.
  - "The National Bank is economically independent and shall cover all expenses with its own revenue. The National Bank shall not be responsible for the liabilities of the Government of Georgia. Likewise, the Government shall not be responsible for the liabilities of the National Bank, except in cases when the National Bank and the Government have committed themselves to guarantee such liabilities."
- Germany
  - Bundesbank Act of 23 March 2002 — Article 42.
  - "The Federal Republic of Germany shall supply the Deutsche Bundesbank on request with Treasury bills or Treasury discount paper in the denominations and on the terms of the Bank’s choice (liquidity paper) up to the maximum amount of 25 billion euro. The liquidity paper is payable at the Bank. The Bank is liable to the Federal Republic of Germany for meeting all obligations arising from the liquidity paper."
- Guatemala
  - Organic Law of the Bank of Guatemala, Decree 16/2002 of April 23, 2002 — Article 9.
  - If bank income insufficient to cover policy costs: charged to General Reserve; if still insufficient, "these shall be absorbed by the Government. Within a period not exceeding 30 days from the end of the fiscal year in question, the Monetary Board shall begin to make arrangements with the executive branch ... for the amount of the uncovered deficit to be included in the draft General Income and Expenditure Budget of the Government for the following fiscal year" and the Ministry will provide Treasury bills or other financial instruments "which shall yield interest at market rates and be negotiable by the Bank of Guatemala on the national or international secondary market."
- Iceland
  - Act on the Central Bank of Iceland [adopted on May 18, 2001] — Article 1.
  - "All obligations of the Central Bank are guaranteed by the State Treasury."
- Jordan
  - Law No. 23 of the year 1971 on the Central Bank of Jordan, amended as of 1992 — Article 9(d).
  - "If the reserves are insufficient to cover any loss in the profit and loss statement for any financial year, an amount sufficient to cover the deficiency shall be paid by the Government within the first three months following the end of the financial year. Such payment shall be a first charge in favor of the Government on the profits which may subsequently be realized."
- Kazakhstan *
  - Law No. 2155 of March 30, 1995 on the National Bank of Kazakhstan, amended as of July 10, 2003 — Article 22.
  - "The government shall not be liable for the obligations of the National Bank of Kazakhstan, just as the National Bank of Kazakhstan shall not be liable for the obligations of the government, with the exception of those cases in which it assumes such liability."
- Kenya
  - The Central Bank of Kenya Act, amended as of January 1, 2001 — (legislative reference appears; text excerpt not included in supplied content).

*Source: _wp0837 - Appendix I. Is the Central Bank Responsible for the State’s Obligations, and Vice Versa?_

### 9. General Reserve Fund.

### 9. General Reserve Fund.

### Establishment and Funding
- The Bank shall establish and maintain a fund designated as the General Reserve Fund.
- At the end of each financial year at least ten per centum or any other amount as the Board, in consultation with the Minister, may determine, of the net annual profits of the Bank shall be transferred to the General Reserve Fund.
- The net annual profits used for this transfer are calculated after:
  - allowing for the expenses of operation;
  - provision for bad and doubtful debts;
  - depreciation in assets;
  - contributions to staff benefit funds;
  - such other contingencies and accounting provisions as the Bank deems appropriate.

### Allocation of Net Annual Profits
- Subject to subsection (1) and section 51, the net annual profits of the Bank, calculated in accordance with this section, shall be paid into the Consolidated Fund.

### Coverage of Net Losses
- The amount of any net losses of the Bank in any financial year which is in excess of the sums standing to the credit of the general reserve fund of the Bank shall be charged upon and paid out of the Consolidated Fund without further appropriation than this Act.

### Comparative Legislative Examples (Excerpts in Table 4)
- Various jurisdictions provide different arrangements for covering central bank losses; examples in the table include:
  - Korea: Any loss shall be offset from reserves and, should these be insufficient, the deficiency shall be made-up by the Government in accordance with the Budget and Accounts Act.
  - Kuwait: If the General Reserve Fund is insufficient to meet the losses of the Bank, the Government shall cover the deficit.
  - Kyrgyzstan*: The Kyrgyz Republic shall not bear responsibility for the obligations of the Bank of Kyrgyzstan.
  - Lao PDR*: If Special Reserve Account balance is insufficient, the Government shall issue to the Bank non-negotiable securities to the extent of the deficiency.
  - Lesotho: Minister shall authorize transfer of funds, negotiable securities bearing market-related terms and conditions or foreign exchange to preserve minimum paid-up capital if assets are less than liabilities and minimum paid-up capital.
  - Lithuania*: The State of Lithuania shall not be liable for the obligations of the Bank of Lithuania.
  - Malawi*: Government shall ensure that the Bank is kept solvent at all times; if General Reserve Fund is exhausted, Government shall immediately cover remaining loss without an appropriation Act.
  - Mongolia: Government shall, within two months of announcement of a deficit, cover the deficit by issuing obligations at market interest rates and placing them in the Bank.
  - Namibia*: If Revaluation Reserve Account insufficient, Government shall issue non-negotiable securities to the extent of the deficiency on terms agreed by Minister and Board.
  - Nepal: His Majesty's Government shall bear the loss that cannot be adjusted after allocations.
  - New Zealand: The Minister shall, without further appropriation, pay to the Bank the amount of any exchange losses incurred by the Bank as a result of dealing in foreign exchange.
  - Nicaragua: Losses applied to prior reserves, then affect capital; Government will transfer negotiable public securities producing interest at a rate equal to average deposit rate to cover capital shortfall.
  - Oman: If general reserve fund insufficient, deficiency shall be a liability of the Government and paid within 90 days.
  - Papua New Guinea*: Minister may create and issue to the Central Bank non-interest bearing non-negotiable notes not exceeding any payment made by the Minister out of the Consolidated Revenue Fund.
  - Paraguay*: Losses imputed to prior reserves, then affect capital; Government will transfer a non-negotiable Government bond in amount of resulting deficit if special account insufficient.
  - Peru*: If reserve is insufficient, within thirty days of approval of balance sheet the Public Treasury shall issue and deliver to the Bank nonnegotiable and interest-bearing debt titles equivalent to the outstanding amount.
  - Qatar*: The Bank shall have a general reserve account to which 10% of the annual net profits shall be transferable; State should issue untransferable bonds, without proceeds, to cover capital deficits per Article (6).
  - Romania: Loss covered from available sources in the following priority order: a) special revaluation account; b) statutory reserves.
  - Russia*: The State shall not be liable for the obligations of the Bank of Russia, unless assumed or provided by federal laws.
  - Rwanda*: Government guarantees the Bank against loss resulting from certain revaluations and will issue Treasury Bills not negotiable and non interest-bearing equivalent to the debit balance of revaluation account.
  - Sierra Leone: Net loss charged to General Reserve; if inadequate, balance carried forward in accumulated losses account and replenished by Government via negotiable securities bearing market-related terms or foreign exchange.
  - Serbia: Republic of Serbia shall guarantee obligations of the NBS; excess of expenditures over revenues covered from special reserves, then budget or debt securities issued by the Republic of Serbia.
  - Singapore: The Government shall be responsible for the payment of all moneys due by the Authority.
  - Tajikistan*: Republic shall not be liable for obligations of the National Bank except by consent of Madjlisi Oli or President.
  - United Arab Emirates*: Should the General Reserve Account be insufficient, the deficiency shall be met by the government; government shall cover net debit balances of foreign exchange revaluation account by issuing non-interest bearing, negotiable Treasury Bonds which are returned out of future net profits.
  - Uzbekistan*: The state shall not be liable for obligations of the Central Bank, unless accepted or foreseen otherwise by legislative acts.
  - Venezuela: If balances for undistributed earnings and capital reserves are insufficient, the Republic shall make contributions by allocating corresponding credits in the budget for the fiscal year following that in which amount was determined; if fiscal accounts do not allow, National Assembly shall authorize special issue of national public debt securities under market conditions and maturity not exceeding five (5) years.

*Note: In the table, countries indicated by an asterisk are those where either the state is explicitly free from the obligation to cover central bank losses; or the state has the power to determine the terms of any compensation; or such compensation is explicitly restrictive in some way (e.g., instruments provided are unremunerated, non-tradable, or both). 

*Source: _wp0837 - 9. General Reserve Fund.*

### 6. Capital

### 6. Capital

### Legal provision on preserving bank capital
- (5) Whenever the Board certifies that the assets of the Bank are less than the sum of its capital and other liabilities, the Minister notwithstanding the provisions of any other written law, shall, on behalf of the Government cause to be transferred to the ownership of the Bank negotiable and interest bearing securities issued by the Government for such amount as is necessary for the purposes of preserving the capital of the Bank from any impairment.

### Key bibliographic and analytical sources cited
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- European Central Bank, 2004, “Opinion on Measures Affecting Suomen Pankki’s Financial Position and Provisions Relating to its Power to Issue Norms,” (January 20) (CON/2004/1).
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- Goodfriend, Marvin, 2000, “Overcoming the Zero Bound on Interest Rate Policy,” Journal of Money, Credit and Banking, Vol. 32, No. 4, Part 2, pp. 1007–1035.
- Goodhart, Charles A. E., 1999, “Myths about the Lender of Last Resort,” International Finance, Vol. 2, No. 3, p. 348.
- Greenspan, Alan, 1997, “Central Banking and Global Finance,” remarks by the Federal Reserve Board Chairman at the Catholic University Leuven, in Leuven, Belgium, January 14, 1997.
- Holtz-Eakin, Douglas, 2004, “The Costs and Budgetary Treatment of Multilateral Financial Institutions’ Activities,” statement by Director of the Congressional Budget Office before the U.S. Senate Committee on Banking, Housing, and Urban Affairs, Washington, May 19, 2004.
- International Monetary Fund, 2002, Manual on Fiscal Transparency (Washington).
- Ize, Alain, 2005, "Capitalizing Central Banks: A Net Worth Approach" IMF Staff Papers, Vol. 52, Number 2 (Washington: International Monetary Fund).
- Ize, Alain, 2006, “Spending Seigniorage: Do Central Banks Have a Governance Problem?,” IMF Working Paper 06/158 (Washington: International Monetary Fund).
- Jácome, Luis I. and Eric Parrado, 2007, “The Quest for Price Stability in Central America and the Dominican Republic,” IMF Working Paper 07/54 (Washington: International Monetary Fund).
- Jeanne, Olivier and Lars E. O. Svensson, 2004, “Credible Commitment to Optimal Escape from a Liquidity Trap: The Role of the Balance Sheet of an Independent Central Bank,” IMF Working Paper 04/162 (Washington: International Monetary Fund).
- JP Morgan, 2002, Japan Markets Outlook and Strategy, (January 24).
- Klüh, Ulrich and Peter Stella, 2008, “Central Bank Financial Strength and Policy Performance: An Econometric Evaluation,” IMF Working Paper (forthcoming) (Washington: International Monetary Fund).
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- Leone, Alfredo, 1994, “Institutional and Operational Aspects of Central Bank Losses,” in Frameworks for Monetary Stability: Policy Issues and Country Experience, ed. by Tomás J. T. Baliño and Carlo Cottarelli (Washington: International Monetary Fund).
- MacKenzie, George A. (Sandy), and Peter Stella, 1996, “Quasi-Fiscal Operations of Public Financial Institutions,” IMF Occasional Paper No. 142 (Washington: International Monetary Fund).
- Meyer, Laurence H., 2000, “Payment of Interest on Reserves and Fed Surplus,” statement by Governor Meyer of the Federal Reserve Board before the Committee on Banking and Financial Services, U.S. House of Representatives, Washington, May 3, 2000.
- National Bank of Hungary, Annual Report, 1995, Section V, “Resolutions by the General Meeting.”
- Okina, Kunio, 1999, “Monetary Policy Under Zero Inflation: A Response to ‘Criticisms and Questions Regarding Monetary Policy,’” Monetary and Economic Studies, Vol. 17 (December) (Tokyo: Bank of Japan Institute for Monetary and Economic Studies). pp. 157–97.
- Robinson, David J., and Peter Stella, 1987, “Amalgamating Central Bank and Fiscal Deficits,” IMF Working Paper 87/73.
- Sims, Christopher A., 1999, “The Precarious Fiscal Foundations of EMU," De Economist, Vol. 147, No. 4, pp. 415–436.
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- Stella, Peter, 2008a, “Varieties of Central Bank Recapitalization Experience,” IMF Working Paper, forthcoming.
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*Source: _wp0837 - 6. Capital*

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