A licence to lose money.

The article discusses whether central banks should worry about capital losses. Like most monopolies, central banking can be a highly lucrative business. But not all central banks are fortunate. The European Central Bank made a loss in 2004, for the second year in a row. The Bank of Japan (BoJ) and other Asian central banks have amassed two trillion dollars in foreign-exchange reserves, perhaps 70% of them in dollars. Should the dollar fall, these central banks will be exposed to heavy capital losses. If China continues to amass reserves at its current pace, a 33% appreciation of the yuan at the end of 2006 might inflict a capital loss of almost 15% of GDP. Losses on such a scale would be deeply unsettling to any central banker. But they would not be unprecedented. Economists at Goldman Sachs reckon that Asian central banks, excluding Japan, hold twice the reserves they need. If these reserves were to lose their value, in local currency terms, the taxpayer might not rush to replace them.