Future Proofing Central Banks’ Financial Strength | 국외연구자료

KDI 경제교육·정보센터

Economic Information and Education Center

최신자료

Future Proofing Central Banks’ Financial Strength

CEPR

2025.03.19

Central banks have successfully used their policy tools in recent decades to meet key mandates in monetary policy, financial stability and payments. They have mostly controlled inflation and stabilized economies and financial systems. This paper argues, however, that diminishing central bank financial strength will increasingly threaten their operational capacity, credibility, and independence. Past policies used to address shocks have bloated many central banks’ balance sheets and already led to large losses. Key trends such as high public debt levels, large fiscal deficits, rising populism, technological advances and growing geostrategic fragmentation further challenge central bank financial strength. To safeguard independence and avoid political interference, central banks need to pro-actively enhance their financial strength. Recommended measures include improving financial reporting, building larger capital buffers, implementing automatic fiscal recapitalization mechanisms with clearly defined triggers, and conducting stress tests. For many central banks, declines in seigniorage income―due to innovative payment technologies―necessitate new revenue sources to cover operational costs. Potential sources include introducing or increasing fees for key financial oversight functions and liquidity facilities, which can also improve private sector risk management incentives. Slightly lower remuneration on commercial bank reserves and new fees can also boost revenues. Central banks should adopt a long-term perspective on their mandates and, where changes are justified on their own merits, should adjust core policies and tools to help maintain financial strength. These adjustments include reducing reliance on unconventional monetary policies, transitioning to a scarce central bank reserves regime, and increasing risk- and cost-sharing with the private sector to limit excessive risks to central banks’ balance sheet and costs arising from financial instability.

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