Should we care about central bank profits?

/ Home
/ Publications

Policy brief

Should we care about central bank profits?

The authors investigate the ECB’s profit-making activity of the last 20 years, assessing how this was achieved and the reasons why we should care more

Publishing date: 30 August 2018
Authors: Francesco Papadia Grégory Claeys Francesco Chiacchio

Download

Central banks are not profit-maximising institutions; their objectives are rather of macroeconomic nature. The European Central Bank’s overriding objective is price stability. Nevertheless, there are three good reasons to conclude that it is preferable for central banks to achieve profits rather than to record losses.

First, taxpayers endow central banks with large amounts of resources and one should be worried if this amount of resources did not produce any income. In a way, the efficient use by the central bank of the financial resources with which it is endowed is as relevant as the efficient use of the human resources at its disposal.

Second, financial strength could affect the ability of monetary authorities to fulfil their mandates. In particular there is the fear that a central bank incurring systematic losses and ending up with negative capital would find it difficult to effectively pursue its macroeconomic objective.

Third, profitable operations might be an indication that central banks are implementing the right policies: to achieve profits the central bank must purchase assets when they are undervalued and sell when they are overvalued, thus stabilising their prices.

Overall, the Eurosystem has so far respected the principle of it being better to realise profits than losses. The accounts of the ECB, indeed of the entire Eurosystem, show that it generates a fairly stable profit flow. Monetary operations, ie refinancing operations, and securities purchases contribute substantially to these profits.

This conclusion is confirmed by measuring the financial results of past purchases of foreign exchange and more recent purchases of securities from a mark-to-market perspective, instead of an accounting perspective. In the specific case of the Public Sector Purchase Programme (PSPP) this was because the coupons on the securities more than offset the capital losses: overall the Eurosystem has bought securities under the PSPP programme at prices higher than current ones.

The considerations that might justify purchase operations, like the PSPP or other similar interventions, are very complex and require careful judgement. Once their macroeconomic desirability is established, however, the ECB has the necessary financial strength to implement them safely.

About the authors

Francesco Papadia

Francesco Papadia is the chair of the Selection Panel of the Hellenic Financial Stability Fund (HFSF). He was, between 1998 and 2012, Director General for Market Operations at the European Central Bank. He worked previously at the Banca d´Italia, first as Director of the International Section of the Research Department and then as deputy head of the Foreign Department. Mr. Papadia has a degree in law from the University of Rome and attended postgraduate studies in Economics and Business at the Istituto Adriano Olivetti in Ancona and at the London Business School.

Mr. Papadia is the author of a number of publications in the fields of International Economics and Monetary Policy. While collaborating with Bruegel, the focus of his research will be on European and global macroeconomic issues, including governance questions.
Grégory Claeys

Grégory Claeys, a French and Spanish citizen, joined Bruegel as a research fellow in February 2014, before being appointed senior fellow in April 2020.

Grégory Claeys is currently on leave for public service, serving as Director of the Economics Department of France Stratégie, the think tank and policy planning institution of the French government, since November 2023.

Grégory’s research interests include international macroeconomics and finance, central banking and European governance. From 2006 to 2009 Grégory worked as a macroeconomist in the Economic Research Department of the French bank Crédit Agricole. Prior to joining Bruegel he also conducted research in several capacities, including as a visiting researcher in the Financial Research Department of the Central Bank of Chile in Santiago, and in the Economic Department of the French Embassy in Chicago. Grégory is also an Associate Professor at the Conservatoire National des Arts et Métiers in Paris where he is teaching macroeconomics in the Master of Finance. He previously taught undergraduate macroeconomics at Sciences Po in Paris.

He holds a PhD in Economics from the European University Institute (Florence), an MSc in economics from Paris X University and an MSc in management from HEC (Paris).

Grégory is fluent in English, French and Spanish.
Francesco Chiacchio

Francesco, an Italian citizen, works in Bruegel as a Research Assistant in the innovation and competition area, with a focus on trade and productivity, as well. Before joining Bruegel, Francesco was a trainee at the European Central Bank, working on projects related to productivity, Global Value Chains and technology diffusion, export intensity, and credit allocation, as well as on macroeconomic projections. He also interned at the European Commission, Directorate General for Competition, involved in projects related to the Directive on Antitrust Damages Action, and provided teaching assistance at the Tinbergen Institute.

He holds a Master in Economics and Social Sciences from Bocconi University, where he specialized in quantitative methods and microeconomics.

Francesco’s research interests include industrial and competition policy, firms and competitiveness, international economics and trade, and resource allocation. His personal interest also lies in possible applications of big data.

He is fluent in Italian and English, and has basic knowledge of German and French.

Theme: Macroeconomic policy and governance Banking and capital markets
Keyword: european monetary union european central bank euro area
Language: English