FRANKFURT — The European Central Bank (ECB) made a net loss of €1.3 billion last year, as a soaring interest bill on all the excess liquidity in the financial system dwarfed the revenue from its stockpile of bonds.
The bank was left with a loss despite releasing almost all €6.6 billion of its risk provisions, the central bank’s annual accounts showed on Thursday.
“There will be no profit distribution to the euro area national central banks for 2023,” ECB said, adding that it is “likely to incur losses over the next few years,” before returning to sustained profits. It didn’t give any more precise estimate of when that would be.
The bank stressed that the loss “has no impact on its ability to conduct effective monetary policy,” noting that its capital and its substantial revaluation accounts together amounted to €46 billion at the end of 2023.
The red ink has been generated by a combination of sharply higher interest rates and a massively enlarged balance sheet. The ECB has spent trillions of euros buying bonds since 2015, many of them at zero or even negative yields. However, it is now paying 4 percent interest on nearly all the excess reserves that it has created in the process. Just under €3.5 trillion is sitting in its deposit facility.
That meant that it paid out much more in interest than it received from its foreign reserve assets, the portfolios of bonds amassed through ‘quantiative easing’ bond portfolios and its share of the income from lending out euro banknotes, known as seignorage.
As the ECB acknowledged, there is more of that to come. Last year, International Monetary Fund economists estimated the Eurosystem, which comprises the ECB and the euro area’s 20 national central banks, would incur total losses of about €55 billion over 2023 and 2024, worth 0.5 percent of eurozone GDP. Even that looks too optimistic now.
“Several factors suggest losses could exceed the figures we projected,” IMF Europe Advisor Ashok Bhatia, who co-authored that paper, told POLITICO.
The higher peak deposit rate of 4 percent, relative to the 3.5 percent assumed in the paper, would mechanically add some €18 billion to the total interest outlay over one year, he noted.
“At the same time, the ECB’s decision to phase out reinvestments of maturing bonds faster than we had assumed also weighs on profitability, as the system foregoes the net income it would have earned by replacing lower-yielding old bonds with higher-yielding new ones.”
The ECB has said that, from July, it will start winding down the reinvestment of proceeds from maturing bonds in its pandemic crisis program — six months earlier than it had previously flagged.
Because of the way the Eurosystem implements monetary policy and distributes its profits and losses, some national central banks will incur much higher losses than the ECB and while others are set to earn small profits.
Among the largest central banks, Germany’s Bundesbank, which will publish its annual results Friday, is likely to be hit especially hard. It expects most of its current risk provisions — around €20 billion — to have been wiped out last year, and the rest to go in the coming years. The IMF paper projected that Bundesbank won’t pay out any profits to Berlin for a decade.