financial requirements for effective policy are conditional on our communications and the stability of our institutional position. as stated in the paper, the central banks have considerable loss - absorbing capacity even over and above their book equity and provisions, if only the present value of future seigniorage income is sufficiently high. so it is not only credit and market risks which are of consequence but the income stream as well. in this sense, a prolonged state of ultra - low interest rates might prove to be a challenge to central bank profitability in the long run, and reduce the risk bearing capacity of the central banks. the bank of finland routinely uses the var ( including expected shortfall ) methodology and also stress scenarios to assess the soundness of its financial position, and publicly reports summary statistics from its var calculations. these calculations show that the bank is able bis central bankers ’ speeches to absorb considerable losses with its provisions and reserves without endangering its capital position. which alternative financial structures might be desirable and feasible? the paper pinpoints the asymmetry of profit distribution as a major source of concern for central banks, especially if the volatility of profits ( including capital gains and losses ) is large compared to the average expected profit flow. the bank of finland suffered heavy losses during the finnish banking crisis of the early 1990s. in the ensuing two decades, the bank has been very successful in achieving a sound, well capitalized financial position which now after the international financial crisis is broadly appreciated in the finnish society. there have been both financial and political factors behind the favourable experience. • flexible rules on provisioning. we are able to book above - the - line provisions from unrealized capital gains which can then be used to cover future capital losses. moreover, the law allows us to book above - the - line provisions also for maintaining the real value of equity capital. • sensible rules on profit distribution. the basic scheme according to law is that half of the accounting profit of the bank be transferred to the reserve fund and the other half paid to the state. however, the law also says that exception can be made from this rule if the financial condition of the bank warrants such exception. it is the supervisory council of the bank, composed of parliamentarians, which makes the ultimate decision. after the finnish banking crisis of the early 1990s, it took until 2000 before any profits were transferred to the state. • the governance structure. the bank of finland is institutionally not subordinate to the government, but instead to the parliament

. the supervisory council which wields the ultimate financial powers over the bank is a parliamentary body separate from the government ministries. it has proven to give a high priority to the financial soundness of the bank of finland, and has not reflected the occasional pressures arising from the ministry of finance for example. • institutional support by the ecb. the ecb ’ s opinions give powerful support to the financial independence of the national central banks of the eurosystem. for instance, when there was political discussion in finland in 2003 about extracting capital from the central bank, the institutional support from the ecb was important in avoiding that action. ultimately however, all of these pillars of central bank financial soundness are dependent on the general understanding of the tasks and responsibilities of the central bank, and on a broad trust and acceptance on its activities and operations. if these are undermined, the provisioning and distribution rules, governance structures and other safeguards of central bank soundness are not on a durable basis. the central bank must therefore strive to demonstrate by acts and words that it serves a public purpose. bis central bankers ’ speeches