To head off any political barbs, however, the banks should communicate that the measures that led to the losses were undertaken to ensure price and economic stability which has a long-term benefit. "To maintain the public's trust and to preserve central bank legitimacy now and in the long run, stakeholders should appreciate that central banks' policy mandates come before profits," the paper said. ($1 = 0.9317 euros) <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Central banks transfers turning to losses ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Reporting by Marc Jones; Editing by Bradley Perrett)
Messaging: marc.jones.thomsonreuters.com@reuters.net Twitter @marcjonesrtrs)) By Marc Jones
LONDON, Feb 7 (Reuters) - Central banks face mounting
losses on the trillions of dollars of bonds they bought in the
past 15 years of rolling crises, a paper from the Bank for
International Settlements (BIS) said, warning that the deficits
could leave them open to political attack.
Having rapidly raised interest rates to fight inflation, the
Federal Reserve and its European peers are now making huge
interest payments to commercial banks on deposits they
themselves created with their massive support efforts, which
were known as quantitative easing (QE).
The Fed's cumulative loss from its quantitative easing now
stands at almost $26 billion. The Swiss National Bank made a
loss of 132 billion Swiss francs ($143 billion) last year, while
the European Central Bank (ECB) now pays 2.5% interest on 4
trillion euros that commercial banks got for free during the
crisis years.
The U.S. Treasury will not need to worry about bailing out
the Fed, which can simply defer any loss. But the Treasury will
still be missing the $50 billion to $100 billion the Fed's bond
profits used to provide each year.
The ECB and a number of national central banks in Europe
have issued warnings, though. Britain's government, which has
received more than 120 billion pounds in profits from the Bank
of England since 2009, has already set aside 11 billion pounds
for the central bank.
The BIS's paper said that when bailouts were required they
risked raising the ire of taxpayers and politicians who then
took aim at central banks' independence.
"If there is macroeconomic mismanagement and the state lacks
credibility, losses may erode the central bank's standing, which
may jeopardise its independence and could even lead to the
currency's collapse," the paper said, referring to the
worst-case scenario.
There were dozens of past examples from developing
economies, including Mexico, Chile, the Czech Republic and
Israel, where central banks can operate without major
difficulties in negative equity, it said.
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