For a private corporation, or a commercial bank, accounting data are a means by which management accounts to shareholders for its performance. In these cases performance is measured by profits and the net worth of the firm. The interpretation of accounting statements is more complicated for central banks, as their main objective is not to maximise profits but to accomplish social goals such as low inflation and a stable financial sector. Striving for these goals will affect the central bank’s accounts but the accounts will not give direct information on its performance in achieving them. 2 However, central bank balance sheets may reveal a lot about the institutional environment affecting the conduct of monetary policy, including the relative degree of central bank independence. 3

This paper reviews how a central bank’s involvement in activities such as foreign exchange intervention and restructuring banking systems at the behest of the government may affect its balance sheet and the possible implications. Section 2 argues that if such operations leave the central bank with low, or even negative, capital its (perceived) independence and ability to conduct monetary policy may be affected. Section 3 sets out some stylised facts about central banks’ balance sheets, and highlights the role of seigniorage in increasing capital and that of the main quasi-fiscal activities in reducing capital.