Central bank capital depletion: Aka, the dark side of QE

The global tightening cycle may well expose central banks to macro relevant losses on the large-scale asset purchases pursued through the pandemic. This is uncharted and fascinating territory.

To start, a shout out to my colleague, Chris Marsh, who was very early in identifying the theme of this article, in a comprehensive post regarding the Bank of England (BOE) via this Substack in September (see here). In a world awash with data and noise, it takes some doing to cut through to a new narrative. It is a testament to Chris’ formidable analytical skills that he authored this new narrative, and well before the eruption in front end rates over the past fortnight.

My purpose here is simply to illustrate that this has the potential to be a global theme over the years ahead: i.e., not limited to Threadneedle Street. It is a fascinating setup as quantitative easing (QE), since the GFC, has been broadly viewed as a free-kick for policy makers. That has been the lived experience. And it has led to what was once regarded as wholly unconventional in the monetary policy domain, being accepted as more or less routine, even inevitable, when confronted with an admittedly profound global shock.