German Central Bank Faces Soaring Losses as Risk Provisions Run Dry
By Business Today
Losses have surged at the German central bank, leading to the depletion of its risk provisions, as higher interest rates take their toll. The Bundesbank recently announced that it had released €19.2 billion from its general risk provisions and €2.4 billion from reserves, resulting in an annual distributable profit of zero. This leaves the central bank with just under €700 million in reserves, according to a press release.
Negative Net Interest Income for the First Time
Net interest income for the German central bank turned negative for the first time in its 67-year history, dropping by €17.9 billion year on year to reach €-13.9 billion. Bundesbank President Joachim Nagel warned that the burdens for the current year are expected to exceed the remaining reserves. He added that the bank will report a loss carryforward that will be offset through future profits.
European Central Banks Under Pressure
The German central bank, like many of its peers, faces significant exposure to interest rate risk due to its securities holdings. The European Central Bank (ECB), which has undergone an unprecedented run of rate hikes, recently reported its first annual loss since 2004. Similarly, the central bank of the Netherlands also announced a substantial loss for 2023.
No Impact on Monetary Policy
Central banks stress that annual profits and losses do not affect their ability to implement monetary policy and control price stability. However, they are closely monitored for their potential impact on credibility, especially if a bailout becomes necessary. Additionally, profits and losses can affect central banks’ payouts to other sources.
Outlook for the German Economy
Despite the challenges faced by the German economy, Nagel expressed optimism about its future. He mentioned that experts expect the economy to gradually recover and experience growth throughout the year. The improvement is anticipated to be driven by foreign sales markets and increased purchasing power among households.
The German central bank’s financial resilience remains strong, as its assets significantly exceed its obligations. However, the ongoing losses serve as a reminder of the pressures faced by central banks in the current economic climate.
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