The European Central Bank is no longer making any money. The monetary authorities closed the past year 2022 with a zero. A loss in the billions could only be averted by the fact that the accountants diverted 1.6 billion euros from the provisions made specifically for this purpose in recent years, as the ECB announced on Thursday. In 2019, the central bank had recorded a plus of 2.3 billion euros, in 2021 it was already significantly less at 192 million euros. The last year of losses was 2004.
It is not the main task of a central bank to generate profits; the fight against inflation is in the foreground. However, the key interest rate hikes initiated as a result are one of the main reasons for the end of a long phase with many gains. The higher interest rates led to value adjustments in our own funds and also in dollar securities. In addition, the ECB now had to pay higher interest in connection with the bond purchases, which were mostly handled by the national central banks, as part of Target2 accounting.
The end of a decade of easy monetary policy with zero interest rates and trillions of euros worth of bond purchases is now generating costs. All central banks in the euro zone are affected. The higher key interest rates mean that the Bundesbank also has to credit the account balances of commercial banks with this higher interest rate. These costs can no longer be offset by the income from the bonds. As a reminder: Banks used to have to pay “penalty interest”, which increased the central banks’ profits. But those times are over. The currency guardians should therefore no longer transfer money to their national finance ministries in the medium term. Taxpayers are losing money. The moment could not be worse for the ECB’s reputation, with many accusing it of delaying the fight against inflation for too long.
Losses are not a drama for central banks
While losses at commercial banks and companies are considered a catastrophe, the monetary watchdogs are more relaxed. The Bank for International Settlements (BIS), the central bank of central banks, has given the all-clear in a technical paper. “It is not the job of central banks to generate income for governments,” say the experts. Any losses would not compromise the central bank in fulfilling its mandate. And the mandate read: “Stable prices and financial stability”. However, the BIS experts conceded that a central bank should not exaggerate the losses.
The ECB is owned by the 20 central banks of the euro zone, and the “shareholders” of the national central bankers are the taxpayers. In the end they would have to stand up straight. The ECB and the Bundesbank still have billions in buffers to offset the coming losses. But the head of the Dutch central bank, Klaas Knot, warned his government, according to the Bloomberg news agency: “The losses will be considerable. In the worst case, capital assistance from taxpayers could be necessary.”