05 April 2016

ECB: Occasional Paper Series: Profit distribution and loss coverage rules for central banks

The purpose of this European Central Bank’s paper is to investigate the policies and practices applied by a significant number of central banks worldwide in relation to profit distribution and coverage of losses.

The analysis also covers the related accounting frameworks, which can affect the extent and the volatility of reported, and therefore distributable, profits and which consequently interact with the profit distribution rules as concerns central banks achieving and maintaining financial strength.

Chapter 2 shows that central banks use different approaches when determining the amount of profit to be distributed to the government and the amount to be allocated to reserves. Chapter 2 also illustrates the magnitude of the impact that profit distribution rules can have on the distributed profits of central banks.

Chapter 3 analyses the link between profit distribution schemes, accounting frameworks and the financial strength of central banks.

Chapter 4 shows that governments have tried to influence the amount of distributable profits by changing the profit distribution rules, by attempting to change the amount of profit distributed under the existing rules, and even by attempting to force the central bank to transfer accumulated reserves from past undistributed profits when its risk exposures did not necessarily justify the diminution in its capital resulting from such transfers. Such actions by the government can undermine the central bank’s financial independence. Conversely, when the structure and risks of a central bank balance sheet change, as happened at great speed in many cases during the global financial crisis and the euro area sovereign debt crisis, the profit distribution rules do not necessarily change in parallel, possibly leading to degrees of profit distribution that are no longer appropriate.

In Chapter 5, the paper identifies a number of general principles that could be considered in relation to profit distribution frameworks, based on the axiom that central banks should be financially independent.

Full publication

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