Bundesbank with record loss of almost 22 billion euros – the reasons – Economy

The German public will have to get used to the fact that, after a few zero rounds, the Bundesbank will not transfer any money to the Federal Finance Minister in the next few years. This means taxpayers are missing out on billions. The loss is a consequence of the loose monetary policy during the Draghi years in conjunction with the rapid rise in key interest rates over the past 19 months. Therefore, the Bundesbank made a loss of 21.6 billion euros in 2023 – in absolute terms, the highest loss in the institution’s history.

“The Bundesbank’s balance sheet is solid, but we do not expect to be able to distribute profits for a long time,” said Bundesbank President Joachim Nagel when presenting the annual report for 2023. The Bundesbank boss assumes that the burdens for 2024 will again be significant and that the remaining reserves will be exceeded. “In this case, the Bundesbank will report a loss carryforward and pay it off with future profits,” said Nagel. In order to absorb the loss in the balance sheet, the Bundesbank had to completely release its 19.2 billion euro risk reserves and use up the majority of the reserves. The Bundesbank is now almost empty when it comes to these items, but points to valuation reserves of almost 200 billion euros, which primarily relate to gold holdings.

The last time there were losses at the Bundesbank was in the 1970s. At that time, dollar reserves had to be revalued. This time the case is different. The Bundesbank and many other central banks in the euro zone are footing the bill for the loose monetary policy of former ECB President Mario Draghi. Under the Italian’s leadership, the Euro system launched a trillion-dollar bond purchase program in 2015. The Bundesbank purchased German government bonds from the large commercial banks and credited the purchase price to the banks’ checking accounts with the central bank. As a result, these German banks are sitting on more than a trillion euros in excess reserves. The ECB pays interest on these deposits at four percent – the key interest rate.

It’s a billion-dollar business for the banking sector, but it’s unevenly distributed because the central banks bought the bonds primarily from the large institutions. The Bundesbank does not break down the commercial banks’ reserves, but when asked, says that ten institutions hold almost half of the total excess reserves. This is likely to be primarily the large private banks and state banks. Unfair? Some experts think yes: The bank-critical association Finanzwende demanded in an open letter to ECB President Christine Lagarde that central banks should not unconditionally enrich the banks with public money in the interests of a neutral monetary policy. But the central bankers see it differently: “We raised interest rates to combat inflation, that was necessary. That’s why I completely disconnect from my thoughts what happens to the banks as a result,” said Nagel, pointing out that the institutions’ deposits would fall as the central bank reduced its balance sheet.

If private banks make losses over a long period of time, they have to raise additional capital. But central banks are different. Central banks “cannot become insolvent in the conventional sense,” as the experts at the Bank for International Settlements (BIS) – the central bank of central banks – emphasize. BIS chief Agustín Carstens said that central banks could function well even with negative capital – that is, when losses have exhausted all reserves. They would only need additional funds if they did not want to operate with negative equity. In Sweden, the law means that the Swedish central bank has to compensate for its billion-dollar deficit with the help of taxpayers. Sweden is not part of the euro zone, but has also bought government bonds on a large scale, which has now caused the central bank to suffer losses. Klaas Knot, the Dutch central bank chief and ECB council member, also warned that Dutch taxpayers might have to inject more money. “I don’t want to downplay the issue,” said Nagel, “but I don’t see the Bundesbank being recapitalized.”

A lower key interest rate could alleviate the distress

The Bundesbank is reporting comparatively high losses compared to other euro central banks because the difference in interest rates between the bonds in its holdings and its interest liabilities to the banks is particularly large. Germany’s government bonds – the Bundesbank purchased these securities – had particularly low interest rates because of the country’s good credit rating. The gap to the four percent deposit interest rate that the Bundesbank has to pay to the banks is significantly higher than that for the Italian central bank. The Banca d’Italia may not have to report any losses at all because the Italian government bonds it purchases carry a higher interest coupon and therefore also bring it higher interest income compared to German bonds.

One way to reduce central banks’ losses in the future would be to lower key interest rates. But by then it will probably be summer at least. “Even though the temptation may be great, it is too early to cut interest rates. However, the price outlook is not clear enough,” Nagel said on Friday. “If we lower interest rates too early or too much, we run the risk of missing our goal. Then, in the worst case scenario, we might have to raise interest rates again.”

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