The Czech National Bank disagrees with the ECB Convergence Report

The Czech National Bank (CNB) disagrees with the European Central Bank’s (ECB) 2010 Convergence Report, in which the ECB assesses the economic and legal convergence of nine European Union (EU) Member States. The CNB’s specific objection concerns the ECB’s new view on the financial independence of national central banks, namely that negative capital “may adversely affect” the central bank’s ability to perform its tasks. The CNB points out that the losses that arose in previous years owing to accounting revaluation of its foreign exchange reserves have never undermined its independence and credibility, which are regarded as very high even on the international scale.

Raising the issue of central bank capital as part of the ECB Convergence Report is an unjustified departure from the European Union’s equal treatment principle,” said CNB Governor Zdeněk Tůma. “This issue has not been raised in any previous Convergence Report despite the fact that the issue of accumulated losses is not new, and has also been relevant to some of the euro area countries, in particular Slovakia.”

The requirement concerning the capitalisation of national central banks was added to the Convergence Report – very surprisingly for the CNB – at a late stage of its preparation. The CNB repeatedly raised critical objections to the passages in question and provided a number of arguments supporting its opinion that negative capital1 does not jeopardise its financial independence. These negotiations, conducted both directly with the ECB and at the level of the European System of Central Banks (ESCB), did not lead to a compromise that the CNB could accept. Therefore, the CNB has decided to declare its disagreement with the ECB Convergence Report.

Specifically, the CNB regards as completely unacceptable the statement – in a section directly concerning the Czech Republic – that “a negative capital situation may adversely affect an NCB’s ability to perform its ESCB-related tasks as well as national tasks. In order to comply with the principle of financial independence and with a view to the future adoption of the euro, Česká národní banka should be provided with an appropriate amount of capital within a reasonable period of time so as to comply with the principle of financial independence.”

The CNB has a good reputation at home and abroad as a credible and fully independent central bank. Throughout its existence, its capital position has never undermined its independence or limited its decision-making and operational capacity in any way. The CNB is therefore convinced that there can be no doubt about its legal and factual independence. Negative capital presents no problem for the CNB, and the central bank is able to meet its obligations.

The accumulated financial losses in the CNB’s balance sheet reflect accounting revaluation losses on foreign exchange reserves in the environment of low inflation and trend nominal exchange rate appreciation. This low-inflation macroeconomic environment is a clear achievement of the CNB’s monetary policy. The accumulated losses have never had an adverse effect on the CNB’s monetary policy and have not curtailed its ability to perform any ESCB tasks. The ECB Convergence Report clearly acknowledges the “orientation of Czech monetary policy towards the achievement of price stability” in the inflation targeting regime.

The CNB has long explored the issue of negative central bank capital in its research publications. They lead to the conclusion that the CNB will be able to cover the accumulated losses from future profits2 stemming mainly from seigniorage (income on money issuance) given the expected slowdown in the trend appreciation of the currency. Profits generated in 2008 and 2009 allowed the CNB to reduce its accumulated loss from almost CZK 200 billion to the current CZK 152 billion.

The CNB’s opinion is supported by, among other things, a report published in May 2009 by the Bank for International Settlements (BIS), which cites Chile and Israel as other examples of central banks operating successfully with accumulated losses. These are successful converging economies with low inflation like the Czech Republic:

“For example in Chile, the Czech Republic and Israel, central banks have for years operated successfully with negative capital … In the Czech Republic, the central bank’s seigniorage income remained sufficient to provide confidence that capital would be rebuilt over time,” says this report prepared by a group of international central bankers and entitled “Issues in the Governance of Central Banks”.3

In its Convergence Report, the ECB at least once every two years assesses the progress made by European Union member states that have not yet adopted the euro but have undertaken to do so in the future in the fulfilment of their obligations regarding the achievement of economic and monetary union. In addition to economic convergence, the report also assesses the compatibility of national legislation with EU law. The recommendation regarding the CNB’s capital appears in this legal part of the document, even though it is not supported by any European or Czech legal provision.

The ECB’s recommendation in the Convergence Report is not based on any legal regulation and is not a convergence criterion; for this and other reasons – and also with regard to the CNB’s actual situation reflected in our arguments – we do not agree with its inclusion in the Convergence Report,” said CNB Governor Zdeněk Tůma.

In the same way as it gradually formed, our accumulated loss will be gradually eliminated using future profits,” he added.

Marek Petruš, CNB spokesman

1. The CNB’s capital amounted to CZK -136.02 billion as of 31 December 2009.

2. An expert view of the topic of gradual elimination of central bank losses is given in the paper “Central Bank Losses and Economic Convergence” by Martin Cincibuch, Tomáš Holub and Jaromír Hurník, which was published today in the CNB economic research bulletin at the following link:

3. The report “Issues in the Governance of Central Banks” is available for download at the following link: