AThis Friday, the Deutsche Bundesbank will present its annual report for 2023 – and will have to report on a deep dip into reserves. For the fourth time in a row, the central bank will probably not transfer any profits to the federal budget. Instead, it will release provisions, many of which date back to the time of former Bundesbank President Jens Weidmann. It is said to be a double-digit billion loss in net interest income, which could almost completely use up the remaining provisions of 19.2 billion euros. Last year, the central bank had access to reserves of around one billion euros. The “Neue Zürcher Zeitung” reported on the loss last week – other sources now said that the magnitude was probably realistic.
A double-digit billion deficit: That's relatively large for a German institution. The German banks made fewer losses even during the financial crisis. German corporations as a whole have historically suffered double-digit billion-dollar losses; for example at Telekom, Eon and Bayer. However, they are relatively rare. Even if the Bundesbank can ultimately compensate for the high loss for 2023 by resorting to the reserves, the reserves will shrink significantly – and the question arises as to whether and how the deficits that are also expected in the current financial year can be compensated for in this way will be possible.
The change in interest rates has consequences for the central banks themselves
What is behind the huge loss? The Bundesbank's annual financial statements are a relatively complex structure in which the interest rate turnaround has left its mark on various parts of the profit and loss statement.
At its core, however, it is about a phenomenon that also affects other central banks and is related to the interest rate increases and previous bond purchases. As a result of the bond purchases, the central banks have huge holdings of bonds on the assets side of their balance sheets – this is where the assets are located – whose interest rates are fixed at a low level in the long term. On the liabilities side – this is where the liabilities are located – there are items for which the central banks now have to pay higher interest rates as a result of the interest rate turnaround; for example for the deposits of commercial banks. This tends to lead to losses in the interest rate hike cycle. Like now.
The Bundesbank is probably particularly affected by the losses. But the European Central Bank (ECB) itself also suffered such losses last year, as did several of the national central banks in the Eurosystem and some central banks in other currency areas. The legal framework in which central banks work varies depending on the country. This also has consequences for how you can deal with the losses. The Swedish Riksbank, which has legal requirements regarding the amount of equity capital to be maintained – and which therefore had to be recapitalized by the taxpayer after losses, attracted attention.
In the euro area, the legal situation varies depending on the country. In a report for Germany, the Federal Audit Office also spoke of the possibility that Bundesbank losses could necessitate a cash injection from the federal budget, depending on the amount and duration. But that was met with opposition. The Federal Ministry of Finance stated that it did not share this conclusion: “A relevant burden on the federal budget” was “very unlikely”.
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