The European monetary authorities’ sharp interest rate hikes are putting a strain on the Bundesbank’s balance sheet. Even if there were a return to profits, it would take a long time to plug the holes, said Bundesbank boss Nagel.
The Deutsche Bundesbank achieved the worst result in its history last year. In order to compensate for the deficit of 21.6 billion euros, provisions and reserves have been almost used up. The remaining provisions serve future obligations to the workforce and therefore cannot be touched.
Bundesbank President Joachim Nagel said today in Frankfurt am Main that there is a “very high probability” that no higher losses will be expected in the future. However, he expects further deficits “certainly for a few years”, which would probably add up to a mid-double-digit billion amount. Since there are only just under 700 million euros in free reserves left, the Bundesbank will report losses from the current year. These losses will build up over the years.
Profits for the household far away
If the Bundesbank were to start making profits again, it would take “further years” to plug the holes, said Nagel. Profit distributions to the federal budget have become a long way off. The Bundesbank most recently transferred almost six billion euros to Berlin in 2019.
The causes of the losses lie in the tasks of the Bundesbank and the European Central Bank (ECB). Both are working on the stability of the European monetary system. For years they bought securities and thus financed states and companies. The ECB and the national central banks currently hold securities worth 4,700 billion euros. The Bundesbank alone accounts for 1,000 billion of this. These securities earn little interest.
Deposits at high interest rates
However, central banks not only have to keep an eye on the system as a whole, but also the specific value of the euro. When inflation returned, the ECB raised interest rates massively. Money should become more expensive and therefore more scarce, which in turn curbs inflation. But it also has the effect that the ECB, Bundesbank and other central banks have to pay higher interest on deposits from commercial banks in their accounts.
On the one hand, interest income from old, long-term securities is low, while on the other hand, current interest expenses are high. The bottom line is that the Bundesbank made a loss of 14 billion euros in interest business last year alone. In addition, there are burdens from settlements between the ECB and national central banks and increased costs.
Rising pension burdens
Despite the high burden, the Bundesbank appears relaxed. Personnel and material expenses grew by one billion euros to almost three billion euros last year. In particular, provisions for upcoming pensions increased dramatically. Board member Sabine Mauderer said there was no savings program, just stricter cost management.
Despite the current and future billions in losses, Mauderer said: “The Bundesbank’s balance sheet is solid.” The Bundesbank’s enormous gold holdings are valued at almost 200 billion, which is too low compared to current market values. The Bundesbank still has a lot of hidden reserves. Asked whether it made sense to sell gold to plug holes, Nagel said he “didn’t think about it for a nanosecond.”
The gold reserves are a “great anchor of trust”. Nagel ruled out the possibility that the Bundesbank could one day be completely run down and the federal budget would have to step in: “I don’t see the recapitalization discussion, not even in my darkest dreams.”
Nagel doesn’t want to know anything about interest rate cuts
Although the sharp rise in interest rates is a key reason for the high deficits at the Bundesbank and other central banks, Nagel doesn’t want to know anything about interest rate cuts. He explained in detail the reasons for a longer-lasting current interest rate level. In doing so, he implicitly opposed central bankers who wanted lower interest rates. The high interest rate level is slowing down the economy. Above all, it slows down inflation. “Especially those who have to make do with little money have one less thing to worry about,” said Nagel.
Nagel emphasized several times that the purpose of a central bank is not to generate profits, but rather to pursue monetary policy. Profits are just a pleasant side effect, so to speak. In contrast to private companies, central banks remain solvent even if they are over-indebted. Simply put, this is because they ultimately produce the money themselves.