Negative Rates and Seigniorage: Turning the central bank business model upside down? The special case of the ECB

Negative rates have invalidated the normal business model of central banks, which consists of issuing zero-interest bearing cash as liabilities and earning a return on their assets (the resulting profits are called “seigniorage”). But many central banks are now earning a negative rate on their assets. Seigniorage, in fact, might now become negative in the euro area and in Japan. Bond purchasing programmes (called usually QE for quantitative easing) offer central banks at least temporary profit opportunities since they can issue liabilities at lower rates than the long-term bonds they acquire. The resulting profits should be regarded in the same way as those of investment banks. For the time being, central banks are making large profits on their investment banking activities, but little in terms of traditional seigniorage. The QE programme of the European Central Bank does not increase its seigniorage revenues, because 80% of the euro area’s sovereign bond purchase programme is done by the national central banks on their own accounts. The policy implication of this assessment is that the seigniorage income of the ECB will be much smaller than many assume and one should thus not count on it as a source for any euro-area projects.