The article was first published on OMFIF on May 26th, 2026.

Biagio Bossone is an adviser to international financial institutions and national central banks. Massimo Costa is Professor of Accounting at the University of Palermo. Together they developed the Accounting View of Money.

Central banks should rethink their accounting frameworks

When the Federal Reserve began recording losses in 2022 – losses that accumulated to over $240bn before beginning to recede – it reached for an accounting device that has no real parallel in the private sector: the deferred asset. Rather than recording a loss against capital, the Fed recorded a claim on its own future earnings, suspending remittances to the Treasury until the claim is extinguished.

The move exposed an important gap in central bank accounting: conventional frameworks recognise asset impairments and negative equity, but make no provision for losses arising from liabilities that carry no redemption obligation – which is precisely what central bank money is. The deferred asset was the improvised solution, papering over a deeper conceptual contradiction. Markets were puzzled. Critics called it an accounting fiction. Some even questioned whether the world’s most powerful central bank was, in some meaningful sense, insolvent.

It was none of those things. The deferred asset is not an anomaly to be explained away. It is, we argue, the most honest thing a central bank balance sheet has ever done, and it points, perhaps inadvertently, towards a fundamental rethinking of how central bank money should be understood.

A device without a theory

The mechanics of the deferred asset are straightforward. When the Fed’s interest payments on reserves – the cost of its post-quantitative easing balance sheet – exceed its income from assets, net losses arise. Under normal accounting, these would reduce equity. But the Fed does not treat them that way. Instead, it records a deferred asset: a notional entry representing future net earnings that must be retained before transfers to the Treasury resume. Operations continue without interruption.

The European Central Bank has handled its own recent losses similarly, carrying them forward against future profits. The Bank of England, the Swiss National Bank and others have faced comparable pressures. In each case, the institutional response has been the same: these are not solvency events. Remittances may be deferred. Recapitalisation is a political question, not an operational necessity.

This is the right answer. But central bank accounting has arrived at it without a theory that explains why it is right. The frameworks remain anchored in a convention that treats central bank money – banknotes, reserves, central bank digital currency – as liabilities on the central bank’s balance sheet: if money is a liability, then losses against it look, at least superficially, like any other debtor’s problem.

What the Accounting View of Money says

The Accounting View of Money, developed by the authors of this article, starts from a different premise. Central bank money is not debt in any economically meaningful sense. When a central bank issues a banknote or credits a reserve account, it does not incur a redemption obligation in the way a borrower does. There is no creditor who can demand repayment in something other than the money itself. The instrument is not a claim on an underlying asset; it is the asset: the foundational monetary unit on which the entire payment and banking system rests.

Under the AVM, the issuance of central bank money generates seigniorage income that conventional accounting fails to recognise – treating what is in substance an equity-creating transaction as a mere liability incurred. Seigniorage is the economic benefit accruing to the issuer of a monetary instrument that others must hold to participate in the monetary system. Unlike interest on debt, it is structural and self-replenishing, tied to the continued demand for the currency rather than to any contractual obligation to service or redeem it.

If this is right, then central bank losses are not erosions of capital in the corporate sense. They are reductions in the flow of monetary income – changes in the distribution of seigniorage across time, between the central bank, the treasury, commercial banks holding reserves and ultimately the public. They may matter for the size of future remittances to government, but they do not threaten the institution’s ability to operate or to honour its obligations, because these are not obligations in the first place.

Where the deferred asset and the AVM converge

This is precisely what the deferred asset implicitly recognises. By recording losses as a claim on future earnings rather than as a capital adjustment, the Fed is treating itself as an institution with a structural, indefinite earning capacity – one that can defer distributions today and recover them tomorrow, since the source of its income is not an asset portfolio that can be exhausted but a monetary function that endures as long as the dollar remains a currency in use.

That is exactly the AVM’s description of a money-issuing institution. The deferred asset makes no sense in a framework where central bank money is ordinary debt. It only makes sense if one accepts that the central bank’s income is constitutive – generated by the act of issuing money itself – rather than contingent on the yield of assets held against liabilities incurred. The Fed stumbled upon the right instrument for the wrong theoretical reasons.

The same logic applies to the ECB’s treatment of losses and to the broader consensus among central banks that negative equity is not a functional problem. These are not ad hoc departures from sound accounting. They are implicit recognitions of something the AVM makes explicit: the standard liability classification of central bank money misrepresents its economic nature.

The case for reform

If central bank money is not debt, central bank accounting frameworks should say so explicitly and systematically.

Concretely, this means three things. First, the monetary base should be reclassified from liabilities to equity on central bank balance sheets, reflecting the AVM’s insight that money issuance generates net worth for the issuer, not an obligation to redeem. Second, seigniorage income should be recognised explicitly rather than suppressed within the liability structure, so that the true distributable income of a central bank is visible and measurable. Third, losses should be reported as changes in distributable monetary income – claims on future seigniorage – rather than as reductions of capital, making the deferred asset not an exception but the standard treatment. Under this treatment, the deferred asset is properly understood as accumulated losses awaiting recovery from future seigniorage – a temporary call on the broader equity of the money-issuing institution, not a charge against capital.

These reforms would not change the operational reality, which central banks already understand intuitively, and which we have outlined in detail for a practitioner audience. What they would change is the public and political narrative. The persistent confusion between central bank losses and corporate insolvency – a confusion that has generated unnecessary political pressure for recapitalisation in several jurisdictions – flows directly from a balance sheet framework designed for borrowers being applied to an institution that does not borrow in any meaningful sense.

The Fed’s deferred asset is, in this light, an accounting intuition in search of a theory. The AVM provides this theory. As argued in a recent OMFIF piece, a deeper understanding of the nature of central bank money also strengthens the case for central bank independence itself. It is time for central banks to close the gap and build their accounting frameworks on foundations that reflect what central bank money actually is.