Where does the National Bank obtain its income?

In contrast to what is sometimes thought, central banks do not obtain their income from the difference between the cost of printing the banknotes and their face value. However, most of their income does come from their issuing activity.

Countries grant their central bank the privilege of issuing currency in the form of banknotes. Historically, banknotes were initially regarded as receipts issued in exchange for a precious metal deposit, before becoming abstract currency: nowadays it is no longer possible to obtain gold from the national bank in exchange for banknotes. However, the banknotes are still recorded as central bank debts on the liabilities side of the balance sheet. These liabilities are not remunerated: banknotes do not bear interest.

As the counterpart to the banknotes, central banks hold assets which are largely contributed by the commercial banks in exchange for the banknotes which they supply to businesses and individuals. To meet their customers’ need for banknotes and to finance themselves, the banks in fact have to either hand over assets such as foreign currencies or borrow from the central bank. The assets and claims which the central bank thus acquires are shown on the assets side of its balance sheet, and most of them are interest-bearing.

The profits which thus result from the holding of interest-bearing assets as the counterpart to non-remunerated liabilities in the form of banknotes are called "seigniorage profits”  or “seigniorage". They are in fact derived from the rights of the lord or “seigneur” in olden days to mint coins, a right now held by the State.

The seigniorage belongs to the public, because it is linked to the issuing monopoly. In all countries of the world there are therefore rules on the sharing of the seigniorage between the State, which holds the right to mint coins, and the central bank which issues the currency: part of the seigniorage goes to the central bank to cover its operating costs and the rest goes to the State. That is true regardless of whether the State owns shares in the central bank.