Raising Rates with a Large Balance Sheet: The Eurosystem’s Net Income and its Fiscal Implications

IMF Working Papers, July 7, 2023

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The Eurosystem expanded its footprint in recent years and now faces a period of loss-making as rising policy rates lift the remuneration of bank reserves while assets churn more slowly.
The paper projects the net income of the Eurosystem and its “top-five” national central banks over a ten-year horizon, finding that losses, while large, will be temporary and recoupable.

Projection horizon: ten-year horizon.
Coverage: the Eurosystem and its “top-five” national central banks.
Main finding: losses are projected to be large but temporary and recoupable through future net income.

Fiscal impacts will be material and must be communicated clearly.
Annual taxes and transfers are projected at 0.1−0.2 percent of GDP, with the possibility of long interruptions in some cases.
Temporary and recoupable nature of central bank losses obviates the need for capital contributions or indemnities from the state; instead, losses can be offset against future net income.

Maintain that capital injections or fiscal indemnities are unnecessary given the temporary and recoupable nature of losses; allow losses to be offset against future net income.
Communicate transparently that fiscal impacts will be material, including annual taxes and transfers of 0.1−0.2 percent of GDP and potential long interruptions.
Adopt more-conservative profit distribution policies in the future steady state to mitigate the on-off pattern of dividends.
Ensure that loss-making remains orthogonal to monetary policy decision-making; loss considerations must not influence monetary policy, consistent with practice at the ECB.
Emphasize that credibility ultimately rests on delivering the price stability mandate.

Central themes: balance sheet expansion, remuneration of bank reserves, asset churn, net income dynamics, profit distribution policy, central bank independence.
Keywords used in the analysis include: balance sheet, central bank independence, Central bank policy rate, distribution policy, ECB Policy, Eurosystem, Eurosystem's net income, Financial statements, Income, monetary policy, net purchase, pooling reference rate, profit distribution, QE portfolio, rate path, seigniorage, selected NCBs, Unconventional monetary policies.

IMF Working Paper: Raising Rates with a Large Balance Sheet: The Eurosystem’s Net Income and its Fiscal Implications (July 7, 2023).