Vol.:(0123456789) Indian Economic Review (2021) 56:255–279 https://doi.org/10.1007/s41775-021-00112-x 1 3 POLICY REVIEW Central bank equity: facts and analytics Sujan Bandyopadhyay 1  · Rishab Devnani 2  · Sudipta Ghosh 3  · Amartya Lahiri 3 Accepted: 4 May 2021 / Published online: 25 May 2021 © Editorial Ofce, Indian Economic Review 2021 Abstract How much capital should the central bank of a country hold? There is no consensus on this matter. We review the balance sheets of 45 central banks from around the world to describe actual practices. The principal fndings are: (a) the average capital- asset ratio of central banks globally (net of revaluation capital which is purely an accounting entry) is 6.56 percent while the number in emerging economies is 6.96 percent; and (b) our Value-at-Risk estimates for the RBI excluding exchange rate risk indicate that the current level of the core capital of the RBI as mandated by the Jalan committee may be too low. We also discuss the policy moral hazards associ- ated with mandating RBI equity payouts to the government. Keywords Central bank equity · Value at risk · Policy moral hazard JEL Classifcation E02 · E58 · E61 1 Introduction How much capital should a central bank have? Central banks globally grapple with this while making decisions regarding how much of their profts to transfer to their ultimate owners and how much to set aside for augmenting their capital (including for contin- gencies funds). In most cases, the owner of central banks is the government (though there are examples such as the US Federal Reserve System, the Swiss National Bank, We would like to thank the referees, Viral Acharya, Paul Beaudry, John Leahy, Raghuram Rajan and Anand Srinivasan for comments and discussions on this topic. All remaining errors are our responsibility. The opinions expressed here are the opinions of the authors and do not refect the views of any organization. * Amartya Lahiri amartyalahiri@gmail.com 1 Arizona State University, Tempe, USA 2 Independent Researcher, Mumbai, India 3 University of British Columbia, Vancouver, Canada