In 20 Words The ECB Explains The Business Model Of Every Central Bank
There were two notable things about a report released by the ECB this morning as part of its Occasional Paper Series titled “Profit distribution and loss coverage rules for central banks“, which purportedly analyzes “how profit distribution rules can affect the amounts distributed and the financial strength of central banks.”
The first highlight, was the very basic asymmetry at the core of the actual analysis – how can one talk of profit of there is no possibility of loss? Printing money to fill “loss” gaps by definition obviates any calculation of profit since the whole premise of risk/return does not exist.
The second highlight comes from footnote 7, which tells you all you need to know about the “business model” of all central banks, and specifically why they can never go “insolvent” – they can and will just print their way out. To wit:
“Central banks are protected from insolvency due to their ability to create money and can therefore operate with negative equity.”
And that, for those curious why every commercial bank in the world is now backstopped by central banks, is all you need to know.
Source: ECB
