Bundesbank Flags Potential Future Losses After Tapping Provisions in 2022

1 March 2023

By Xavier D’Arcy – FRANKFURT (Econostream) – The German Bundesbank announced on Wednesday that it had tapped €1 billion of risk provisions to avoid making a loss in 2022, and warned that there may be losses on the horizon once provisions run out.

‘The Bundesbank is reporting a result of zero in its profit and loss account for the 2022 financial year’ after tapping the €1 billion, Bundesbank President Joachim Nagel told reporters in Frankfurt on Wednesday.

Following the sharp tightening in monetary policy since the middle of last year, ‘the burdens on the Bundesbank’s profit and loss account are likely to increase considerably in the years to come’, he said.

From 2024 onwards, he warned, ‘the burdens will probably exceed our financial buffers’, which have so far enabled the institution to avoid making a loss.

If this happens, ‘we will report a loss carry-forward … with the help of future profits, we will then offset the loss carry-forward over the course of time’, he said. This was nothing new, he added: ‘The Bundesbank already did this back in the 1970s.’

There were two reasons for the ‘exceptional financial burdens’ the Bundesbank faced in 2022, he said. One was ‘the rise in US capital market rates, which caused our foreign currency reserves to lose value’, and the other was ‘the rise in euro area policy rates.’

Ultimately, the trends in the Bundesbank’s earnings were ‘the result of the exceptionally accommodative monetary policy of the past few years’, he said, adding that now, ‘a tight monetary policy is needed in order to restore price stability in a timely manner.’

The Bundesbank said in a press release accompanying the annual accounts that if monetary tightening ‘entails strains on the balance sheet, we will have to cope with them, and we will be able to cope with them. The burdens will pass, and we will subsequently make profits again.’

‘The turnaround in interest rates has set a great many things in motion,’ Bundesbank Executive Board member Joachim Wuermeling said, and ‘our profit and loss account for 2022 bears testament to this complexity.’

Last year, there was a significant increase in net interest income, the largest item in the profit and loss account, from €2.5 billion to €4 billion, the accounts said. However, the net result of financial operations was affected by the increase in US yields, the Bundesbank reported, resulting in write-downs from valuation losses of €0.9 billion and realised losses of €0.8 billion in foreign currency-denominated securities.

Additionally, the increase in euro area interest rates meant the Bundesbank had to pay higher interest rates on deposits held by commercial banks.

Despite these challenges, income from their substantial bond portfolios remained relatively constant, according to the Bundesbank. Nagel was nonetheless keen to emphasise his concerns about the impact of asset purchases. ‘The Bundesbank has repeatedly pointed out the financial risks associated with the extensive asset purchases’, he said.