Why do major central banks like the ECB care about and protect their balance sheets and capital bases (i.e., protect themselves against losses and 'insolvency') to an extent that this may constrain their monetary policy-making, despite a plethora of historical examples in the literature of monetary authorities that have operated with persistent losses and even negative capital without apparent problems? The pre-crisis economics literature on this question asserts (and for the most part concludes) that while central bank losses and negative capital may not necessarily pose a 'technical' problem for central banks' achievement of their assigned policy objectives, they could eventually become a problem 'politically' down the road. However, political economy scholarship has not taken up these calls for an investigation into the alleged politics of central bank insolvency, or what I call the spectre of 'central bankruptcy'. This paper draws on different strands in the political economy literature to show how this gap can be filled. In particular, it suggests fusing scholarship on ideational power and strategic action into an audience costs framework of institutional commitment that can help make sense of the puzzling politics of CB capital. Looking ahead, while the spectre of insolvency was mostly 'not foreseen as an issue in central bank independence' before the crisis (Posen 2017), I submit that it evolved into an important factor in central bankers' reaction function in Europe and beyond, and should thus be reflected upon in future discussions of institutional reform.
