ABSTRACT
This chapter uses the conventional business definition of capital, namely shareholders’ funds, as measured by a generally accepted accounting framework.1 This measure of capital is the residual net assets that would, theoretically, be
available to the shareholders in the event of a winding up of the corporation (most central banks are corporations so this term is appropriate here). This view of capital is also a measure of the shareholders’ investment in the corporation, and of its size in comparison with other providers of finance. It is not the market value of the shareholders’ interest. The latter is for most corporations a very different item, based on the value of the shares in an investment market, for example on the basis of potential sales of shares or dividend flows. The market value may also take into consideration factors such as brand names and other items that are not reflected in the actual financial statements of the entity. This is not relevant for central banks. Their objectives are the discharge of public functions described by statute, not maximizing value. For central banks the concept of value in a winding up is not relevant. Similarly the possible market value of the central bank’s shares is not really a relevant issue (although the shareholders of those central banks that have outside shareholders may disagree!), since the sale of all or part of a central bank’s shares is improbable. In particular the largest ‘asset’ of many a central bank, the right to seigniorage on note issue, is unlikely to be passed out of public ownership. The other point, the measure of the shareholders’ investment in the central bank on a basis comparable to that of other providers of finance (creditors), is relevant. It gives an indication of what part of the funding of the central bank is being provided by the shareholders, normally the public sector and often the central government itself, as against what is being provided by other sectors, for example note users, commercial banks via compulsory or other deposits, or overseas lenders via foreign exchange liabilities. The capital of a central bank should thus be regarded as one of the sources of finance for a central bank, and the one provided by the shareholders. On this basis, it is apparent that negative capital of a central bank can be regarded as a form of loan to the shareholder (the state in most cases) from one of the other sources of finance. A unique characteristic of central bank finances is the currency in circulation liability. While this is formally a demand liability, the fact that a large portion of it will never be called upon gives it quasi-equity characteristics. It can also be considered similar to the core level of deposits in a clearing bank.
