Central Bank Capital and Shareholder Relationship


In pursuing its mandate, a central bank assumes financial risks through its mon- etary policy operations. Central bank capital is a critical tool in mitigating these risks. We investigate the concept of central bank capital as a mechanism for risk- sharing with its shareholder. Adopting an option pricing framework, we explore the setting where the central bank commits to distributing dividends when its cap- ital is robust, while the shareholder may be called upon to recapitalize the bank during adverse economic conditions, with negative capital. Our analysis dissects the trade-offs inherent in these options, seeking a mutually beneficial agreement that disincentivizes deviation for either party. This equilibrium is essential for safe- guarding the independence and credibility of the central bank in executing monetary policy effectively. Download paper here

Recommended citation: Bonetti, Matteo and Broeders, Dirk and Chen, Damiaan and Dimitrov, Daniel, Central Bank Capital and Shareholder Relationship (April 8, 2024). De Nederlandsche Bank Working Paper No. 809/ April 2024, Available at SSRN: https://ssrn.com/abstract=4788392 or http://dx.doi.org/10.2139/ssrn.4788392