klaas knot : central bank capital - of capital importance? speech by mr klaas knot, president of the netherlands bank, at the dnb - risk management workshop on " central bank capital in turbulent times ", amsterdam, 12 april 2024. * * * good morning everyone. welcome to the second day of this workshop on'central bank capital in turbulent times '. and this title really does sum it all up. central banks around the world are going through some pretty turbulent times these days. with huge losses. and the dutch central bank is no exception. the last time the dutch central bank faced a similar turbulent situation was roughly a century ago, in 1931 to be exact. the turbulent times that caused significant losses back then, had to do with the gold standard. after the first world war, the netherlands and the united kingdom agreed that, for the dutch gold held in the uk, the dutch central bank would accept pounds sterling. as a result, the dutch central bank had a vast amount of british pounds on its balance sheet. but by the 1930s, the british economy was in stormy weather – with high unemployment and an overvalued currency hindering export. and even though the dutch central bank got guarantees from the bank of england that they would not leave the gold standard – they did so overnight, and effectively devalued the pound. as a consequence of this devaluation, the dutch central bank was left with huge losses. losses that were one and a half times the size of its capital. today, almost a hundred years later, in a world that looks a lot different, we find ourselves again in a situation with huge central bank losses. the dutch central bank had to report a loss of 2. 3 billion euros for 2023 – and our projected cumulative losses over 2023 until 2028 are 9 billion euros. our neighbours at the bundesbank reported a loss of 21. 6 billion euros in 2023. and across the atlantic, the us federal reserve published a loss of 114. 3 billion dollars last year. we know how we got here. and we know we have lessons to learn. so, let me begin by taking a step back. up until a few years ago, and especially since the 2008 global financial crisis, inflation was persistently low. in response, and with the aim of countering deflation risks, stabilising our economies and safeguarding monetary policy transmission, central banks around the world expanded their toolkits to include

it was argued that capital requirements applicable to loans to these firms, especially under the irb approach, would increase compared to the existing framework, leading to an increase in their financing costs or, possibly, to a decrease in the amount of credit supplied to them. both these factors would adversely affect their financial condition. this, in turn, would have negative consequences for economic growth and employment and would impact on financial stability, particularly in countries such as greece, where smes account for a large share of total output and employment. i believe, however, that the final version of basel ii substantially alleviates these concerns. in greece, the majority of banks will adopt the standardized approach. for the significant part of their total exposures to smes, which will qualify as retail exposures, the applicable risk weight will actually decrease compared to the existing framework. for most of the remainder, the risk weight will remain unchanged. even in the case of banks adopting the irb approach, most of their sme customers are expected to derive some benefit either from the firm - size adjustment for corporate exposures or from the generally lower risk - weight function for retail exposures. increased disclosure under pillar iii is expected to strengthen market discipline by increasing transparency. this will have a positive effect on stability to the extent that anticipated market reaction dampens banks ’ incentives to assume excessive risks. however, the influence on bank behavior of the direct market discipline exercised by depositors, other creditors, and shareholders, is often limited either because these stakeholders lack sufficiently strong incentives or because, in some cases, the interests of the different stakeholders do not coincide. in particular, the actual or presumed existence of public safety nets may dampen the incentives of depositors to exercise discipline. wider and more pertinent public disclosure is expected to enhance the information content of listed banks ’ share prices and of interest spreads on subordinated bank debt. this will increase the accuracy and predictive power of fragility indicators based on market data, such as the distance to default, an indicator derived from market prices of bank shares. at this point, i may mention that the 10 banks whose shares are listed in the athens stock exchange account for over 75 % of the total assets of all credit institutions operating in greece. based on empirical evidence, changes in the distance to default represent a useful forward - looking indicator for stability assessment purposes, especially if based on weighted average values for the entire banking sector rather than for each individual bank. in general, marketbased fra