LinkedIn Friday Quiz

Australia

While some central banks have operated for years with “negative equity”—when the amount owed by a borrower is greater than the value of their assets—the Reserve Bank of Australia (RBA) suffered losses only in 2021-22 after taking measures to shore up the domestic economy during the COVID-19 pandemic. In principle, a central bank having negative equity is akin to a homeowner who borrowed against the value of their home, then watched the home’s value drop below the amount they borrowed. Central banks, though, operate very differently than other borrowers.

Generally, rising interest rates in many countries can cut profits or lead to losses at some central banks, especially those that bought domestic currency assets for macroeconomic and financial stability objectives. The decline in net interest income resulting from higher rates, coupled with rising bond yields and declines in asset valuation, may further pressure on central bank profitability. In some cases, depending on the size of losses and variability in accounting approaches, negative equity can result. Central banks are typically protected from bankruptcy and indirectly backed by taxpayers, which allows them to successfully operate without capital and withstand lengthy periods of losses and negative equity.

After interest rates spiked in 2022, the RBA posted a net accounting loss of AUD $37 billion ($25 billion in USD) and AUD $12.4 billion in negative equity. The bank planned to retain future profits until capital levels were restored. Between 2002 and 2021, 10 out of 32 emerging markets or state-owned central banks posted accounting losses. In many cases, their dip into negative equity was brief. However, at least three banks—Chile, Czech Republic, and Mexico—experienced years of negative equity. Despite the losses, these central banks fully met their objectives, which typically include price and financial stability rather than simply serving as a revenue source for governments.

Churn, burn, and bury

Churn, burn, and bury refers to a stockbroker making many risky trades, thereby raising turnover (sometimes known as churn and burn) in client accounts. Note there are other professions that engage in churning as well. Medical practices requiring unnecessary patient visits may be accused of churning, as well as law firms padding billable hours with extra motions or paperwork (churning or running the meter). Detinue, replevin, and trover are tort legal actions related to the recovery of property. Meanwhile, yank-cheating is a form of theft, namely inserting paper money into a vending machine and yanking it out, taking both the merchandise and the money (this doesn’t work on newer vending machines). As for veal-money, tenants in Wiltshire, England once paid their rent in the form of veal. This became inconvenient over time, so the practice was abandoned in favor of “veal-money,” or fixed payments annually in place of actual veal.