Is the French Central Bank Going Broke?

I once had dinner with a Federal Reserve Board governor who told me that central banks can’t go bankrupt. I didn’t agree with her, and this story makes me even more sure that even central banks can find themselves in severe financial distress.

Reuters reports that the Banque De France (the central bank of France) suffered a pre-tax loss of over €12 billion in 2023 and was forced to tap into a rainy-day reserve to cover the losses. The loss was due to the fact that the European Central Bank (ECB) has been raising interest rates steeply since 2022, which has increased the interest the Banque De France has to pay on the commercial paper it issues and other liabilities on deposit with it.

The U.S. Federal Reserve has faced similar cash flow losses. At times, the Fed has had a negative net worth on a mark-to-market basis (although the Fed does not actually mark-to-market in its accounting, so the losses are buried). The Fed makes up these losses by the Treasury agreeing to let the Fed keep cash that would otherwise be remitted to the Treasury.

So far, these and other central banks have been able to keep their heads above water with rinky-dink workarounds of the type described. It’s not clear that can go on forever.

In the meantime, it’s a good idea for investors to hold some assets that don’t rely on central bank credit, such as gold, silver, real estate, fine art and natural resources. When the lights go out at the Fed and Banque De France, those diversified investors will still sleep soundly.

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