Relationship between central banks’ activities and their profitability

Abstract

Central banks across the world are facing a challenging situation related to their negative profitability. Even if the problem itself should not pose any threat to the viability of these banks, the whole issue related to negative profitability may be politically sensitive. Unlike commercial banks, central banks enjoy a uniqueness related to the link between them and society. This relationship comprises not only benefits to central banks, but also some obligations central banks must render to society. The whole sequence of events to be described in this article and clearly beyond the influence of central banks contributed to a situation where the aforementioned benefits started to decrease, while the scope of obligations began to rise. Such a combination had to affect their profitability, at least temporarily. The aim of this article is to explain the reasons behind the entire sequence of events which contributed to the current circumstances central banks are trying to defy. In order to understand the complexity of the entire story of central banks’ profitability, a brief analysis will be done containing both elements of history of central banking and, above all, elements related to the unique (but not homogenous) accounting rules pursued by central banks across the world.