German Central Bank’s Skyrocketing Losses Erase Risk Provisions

During Deutsche Bundesbank’s “Annual Report 2023” news conference in Frankfurt, Germany, Joachim Nagel, the central bank’s president, addressed the bank’s financial status on Friday, Feb. 23, 2024.

The German central bank faced a significant surge in losses into the tens of billions in 2023 due to ascended interest rates, leading to a draw from its entire provisions in order to balance its accounts. A yearly distributable profit of zero was reported by the Deutsche Bundesbank on Friday. This came about after utilizing 19.2 billion euros ($20.8 billion) from their provisions for general risks, in addition to 2.4 billion euros taken from their reserves, zeroing out the total. According to the central bank, their reserve rests just under 700 million euros.

It was an unprecedented event in the 67-year history of the central bank, with the net interest income becoming negative for the first time. The bank experienced a reduction of 17.9 billion euros year on year, reaching -13.9 billion euros. According to Joachim Nagel, the bank anticipates heavy financial burdens in the current year, which may surpass the remaining reserves.

Despite the financial hardship, Nagel reassures that the Bundesbank has a firm standing. Its assets notably outweigh its obligations. The German central bank holds significant securities exposed to interest rate risk, as do many other global counterparts. These have been considerably influenced by the European Central Bank’s (ECB) unexpected sequence of rate increases.

A 1.3 billion euros loss was reported by the ECB on Thursday, taken as a first since 2004. The ECB had to draw on its own risk provisions of 6.6 billion euros. The losses followed their financial encouragement over almost a decade, printed currency, and bought massive amounts of government bonds to amplify growth. These actions now call for substantial payouts. On Friday, the Dutch central bank reported a 3.5 billion euro loss for 2023.

Central banks state that their ability to implement monetary policies and sustain price stability is unaffected by annual profits and losses. However, their credibility might be in question if a bailout appears to be a risk, affecting their payouts to other sectors.

As far as the Bundesbank is concerned, they have not made payments to the federal budget for a few years. They announced on Friday that they do not anticipate to do so for a considerable period in the future. Similarly, the ECB will refrain from profit distributions to euro zone’s national central banks for 2023.

On Friday, Joachim Nagel confirmed that elevating interest rates was the correct strategy to control high inflation. He indicated that considering interest rate cuts would only be plausible for the ECB’s Governing Council once data confirms a return to a targeted inflation rate. He mentioned that the German economy is expected to gradually recover over the year, backed by foreign sales markets and strengthening households’ purchasing capability, ultimately leading to a path of growth.

A correction was made due to a previous incorrect statement about the bank’s age. The Bundesbank has been operational for 67 years.