Question

How do we assess the performance of a central bank? Given this, how would assess the performance of the RBA over the last decade?

Answer 1

Generally, the performance of central banks is judged by the public and government in terms of its policy mandate. Financial performance tends to be in the background when the impact and performance of the central bank is debated. But they are not completely separable. Occasional and moderate financial loss is unlikely to seriously impair a central bank's operations. But sustained loss and diminution of equity, or a very large, even if exceptional, negative income (P&L) impact on public finances is likely to erode the institution's credibility and policy freedom.

Governments are beneficial owners of central banks, and conceptually the central bank's cash flows and the equity investment in the central bank can be consolidated into broader whole-of-government finances. Conceptually, a central bank's net asset position is part of the public sector's balance sheet, irrespective of whether a consolidated balance sheet is prepared. For example, policy decisions that influence the size of the central bank's balance sheet expose the central bank's equity to risk, and therefore the value of the government's ownership interest in the central bank.

Sound management of the central bank's balance sheet is also important to maintain the central bank's standing and credibility as a regulator and supervisor. The financial risks of central banks should be managed in a business-like way similar to our expectations of commercial banks. Failure to do so may result in a central bank's operational discretion being fettered by institutional rules, removal of decision-making authority, or in extreme circumstances by intervention in the management of the central bank.

At the same time, there needs to be recognition by all stakeholders of the significant financial risks that central banks take. They manage what are often among the largest foreign asset portfolios in the economy, and can have extensive credit exposure to individual financial intermediaries.