Could the central bank's historical record net loss for 2022, in the context of its monetary policy and speculative transactions in international financial markets, mean a decrease in security in the banking system?
The main purpose of a central bank's activities is to take care of the value of money, its stability against other currencies and the security of the banking system. However, since the 1970s, since the period of the rise of monetarism developed in accordance with Milton Fredman's concept of monetarism, the increase in the scale of economic globalisation, the transition of international monetary systems from the USD-based system, the system established after the Second World War in Bretton Woods to a system of free market exchange rates, the abandonment in the USA of gold parity with the USD currency, the growth of multinational corporations, the increased importance of speculative financial transactions carried out on foreign capital markets, including securities markets, etc. Central banks are also involved in the processes of stabilising the economy as part of anti-crisis programmes and protecting national labour markets, with the aim of limiting the scale of the increase in unemployment. In some countries, these new, additional central bank functions are added to the legal regulations shaping the functioning of the central bank. In some countries, the issue of linking the central bank's monetary policy is implemented informally.
For years, the central bank in Poland has also been conducting speculative transactions on international financial markets using various currencies and securities. For many previous years, the bank generated a net profit of PLN 9-10 billion of which 95 per cent of this profit was transferred to the state budget by the politically connected central bank to the government, instead of feeding the central bank's reserves and increasing the security of the financial system. For 2021, the central bank in Poland, i.e. the National Bank of Poland, generated as much as PLN 11 billion in net profit thanks to speculative transactions on the international financial markets, almost all of which went to the state budget rather than to central bank reserves, as usual. The annual profit generated by the central bank in Poland until 2021 was a consequence of, among other things, the monetary policy pursued by the bank, which consisted in successive depreciation of the domestic currency PLN against other currencies. However, for 2022, the National Bank of Poland unexpectedly raked in a historically record loss of PLN 17 billion. Could it be that the speculative transactions carried out in 2022 on the international financial markets turned out to be wrong this time? In addition, another key question arises: to what extent will this kind of situation result in a decrease in the level of security of the entire banking system?
In view of the above, I address the following question to the esteemed community of scientists and researchers:
Could the historically record net loss of the central bank for 2022, in the context of the monetary policy pursued and the speculative transactions carried out on the international financial markets, mean a decrease in security in the banking system?
And what is your opinion on this?
What is your opinion on this subject?
Please respond,
I invite you all to discuss,
Thank you very much,
Best wishes,
Dariusz Prokopowicz
A net loss by the central bank could lead to a decrease in confidence in the banking system, which may affect the overall stability and security of the financial markets. A central bank's financial performance and its ability to maintain stability in the banking system are crucial to the overall health of the economy. It is essential to carefully monitor and assess the impact of any monetary policy and financial transactions to ensure the stability and security of the banking system.
Could it be that the speculative transactions carried out in 2022 on the international financial markets turned out to be wrong this time?
To what extent will this kind of situation result in a decrease in the level of security of the entire banking system?
It is possible that speculative transactions carried out on international financial markets in 2022 may turn out to be wrong, as it is not uncommon for speculation to result in unexpected outcomes. However, it is important to note that speculation is a common and integral part of financial markets, and it is not necessarily indicative of a decrease in the level of security of the entire banking system.
That being said, the impact of speculative transactions on the banking system and the overall economy depends on several factors, such as the volume and nature of the transactions, the financial strength and stability of the involved parties, and the effectiveness of regulatory frameworks in managing risks and ensuring stability.
If speculative transactions result in significant losses for banks or other financial institutions, it could affect their financial stability and solvency, which may pose a risk to the overall stability of the banking system. In such cases, regulators may need to take action to mitigate risks and protect the banking system from potential contagion effects.
Overall, while speculative transactions carry inherent risks, it is important to have strong regulatory frameworks in place to manage and mitigate these risks to ensure the stability and security of the banking system.
Speculative transactions in financial markets can lead to significant losses for banks, particularly if they engage in excessive risk-taking or use leverage to amplify their bets. A large enough loss can erode a bank's capital and impair its ability to absorb future losses, potentially leading to insolvency and systemic risk for the entire banking system.
According to a study by Cihak and Hesse (2010), speculative trading activities have the potential to destabilize the banking sector and cause systemic risk. The authors found that financial institutions that engage in speculative trading activities tend to have higher risk profiles and are more likely to experience financial distress. Furthermore, the study suggests that regulatory policies should be implemented to mitigate the potential risks associated with speculative trading activities.
Similarly, a study by Chan and Wang (2014) found that the increasing trend of speculation in financial markets has led to higher levels of systemic risk. The authors argue that speculative trading activities can lead to asset bubbles and financial crises, which can have severe implications for the banking sector and the broader economy. The study suggests that regulators should take a proactive approach to manage systemic risk and prevent excessive speculation in financial markets.
Another study by Mina (2019) analyzed the impact of speculative trading on the banking system in emerging markets. The study found that speculative trading activities can increase the risk of financial instability, particularly in countries with weaker financial regulations and institutions. The study suggests that regulators in emerging markets should focus on improving their financial regulations and supervisory frameworks to mitigate the risks associated with speculative trading.
Cihak, M., & Hesse, H. (2010). Speculative attacks and financial stability. Journal of Financial Stability, 6(3), 129-142. doi: 10.1016/j.jfs.2010.02.002
Chan, K. F., & Wang, H. (2014). Systemic risk and financial market speculation. Journal of Banking & Finance, 44, 131-141. doi: 10.1016/j.jbankfin.2014.03.006
Mina, W. W. (2019). The impact of speculative trading on the banking system in emerging markets. Emerging Markets Review, 38, 286-303. doi: 10.1016/j.ememar.2018.08.005
Interesting question!
I think in a formal way it is impossible for a central bank to have a bankruptcy, compared to a private bank.
Yes, net loss of central bank lost the public confidence regarding banking system, which effect the country macroeconomics policy i. e. stability.
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