olaf sleijpen : on the pivotal role of central bank capital speech by mr olaf sleijpen, executive board member of monetary affairs and financial stability of the netherlands bank, at the dnb - risk management workshop on " central bank capital in turbulent times ", amsterdam, 11 april 2024. * * * good morning, esteemed participants. this workshop convenes at a pivotal moment for central banks, and the chosen title reflects this significance. over the past decade, the post great financial crisis monetary policies followed by a global surge in inflation and subsequent monetary tightening resulted in significant losses for central banks across the globe. amidst widespread central bank losses, the significance of central bank capital has surged. central bank capital plays a pivotal role as a buffer to absorb risks stemming from monetary policy operations. also dnb, the dutch central bank, is experiencing a large loss due to the eurosystem's monetary policy, estimated at 9 billion euros during the period 2023 until 2028 ( a bit short of 1 % of gdp ). in the recent revision of the capital policy, both dnb and the ministry of finance a€ “ representing the bank's sole shareholder - reaffirmed the pivotal role of central bank capital. they emphasized the urgent need to reestablish robust buffers, especially during periods of profitability for central banks. indeed, if you want to achieve an effective capital policy you need to engage in a thorough and transparent dialogue with the central bank's shareholder, typically the government. throughout the revision of dnb's capital policy, we meticulously outlined to the shareholder the sources of financial risks and the rationale behind their materialization into losses. then we delineated how central bank capital serves to mitigate impending losses and elucidated on how future profits will contribute to rebuilding our capital position. dnb and its shareholder have reached a consensus on a strategy to gradually rebuild buffers through the retention of future profits, rather than opting for recapitalization. this decision underscores the mutual commitment to preserving central bank independence. furthermore, it signifies the robustness of dnb's capital position, reassuring stakeholders that the central bank policies remain effective despite the erosion of capital over the coming years. in essence, dnb regards capital as paramount, because it ensures the central bank's ability to fulfill its mandate even amidst challenging economic conditions. this commitment to maintaining a strong capital base underscores our dedication to safeguarding

wake of the 2008 global financial crisis. thanks to these reforms, banks have been able to absorb the covid shock. they have continued to provide credit to the economy at a time when it is most desperately needed. although covid - related corporate insolvencies will no doubt hit their loan books pretty hard, it seems banks will also be able to 2 / 4 bis central bankers'speeches continue supplying credit in the near future. i really want to emphasize this, because it offers a valuable lesson. many of you probably recall the tough discussions we had only a few years ago about the cost of the rising capital requirements for banks, and the possible negative impact on credit supply. but if we had not done this, governments would now have to deal with a crippled banking sector in full deleveraging mode, on top of an economy starved of credit. we would have had a crisis within a crisis. in other words : building resilience into the financial system in good times may seem expensive, but over the long run it is the most cost effective thing to do. so the banking sector has withstood the covid stress test pretty well. however, you and i know that not everything went smoothly in the financial system, as events in march last year showed. let us go over some of the key developments that happened. as countries went into their first lockdown, and the scale of the covid impact became apparent, investors and corporates fled for safety and liquidity. you probably remember how firms everywhere tried to tap the capital markets. money market funds experienced significant outflows. and some open - ended funds faced large redemptions. initially, yields on risk - free assets fell rapidly at the end of february and early march due to the flight to safety. however, this became an abrupt and disruptive ‘ dash for cash ’ in mid - march, as investors demand for cash and near - cash assets rose sharply. this resulted in selling pressure on usually safe and liquid assets such as government bonds. risk - free yields began to rise sharply and the financial conditions facing major economies tightened. looking at a bloomberg screen during that period sometimes felt like being back in september 2008. central banks had to take extraordinary measures to stabilize markets : asset purchases, liquidity operations, and backstop facilities for specific financial entities. while in 2008 central banks had to bail out the banks, this time they had to bail out a number of financial markets. some of this may have been inevitable given the en