Bill for the expansionary monetary policy: The Bundesbank and the ECB together make a loss of almost 30 billion euros

For two years now, Europe's central banks have been feeling the full force of the consequences of what was once a long, extremely expansionary monetary policy and the purchases of securities worth trillions. On Tuesday, the German Bundesbank reported a balance sheet loss of 19.2 billion euros for 2024. Without the release of a few remaining reserves, the loss would have been almost 20 billion euros. For the Bundesbank, it is the first loss since 1979 and also the largest in history.

Last week, the European Central Bank (ECB) announced that it would have suffered a loss of almost 8 billion euros in 2024.

Last year, the two central banks almost suffered losses running into billions. However, they were able to compensate for the resulting operating deficit with the reserves they had. This year, however, there were hardly any reserves left, which is why the losses are now almost fully felt.

The Bundesbank's operating losses for 2023 were 21.6 billion euros. However, thanks to provisions and reserves, the institute was just able to absorb these losses, so that the bottom line was zero. Last year, the ECB had even already had to publish a loss of 1.3 billion euros because the provisions were no longer sufficient.

The reason for the red numbers is the immense purchases of securities in previous years, which led to an enormous excess liquidity in the system. On the one hand, central banks such as the Bundesbank had mainly purchased government bonds as part of the ECB's monetary policy, although these had very low interest rates. The national central banks, which are partly responsible for implementing the ECB's monetary policy, mainly purchased government bonds from their home countries. However, German securities only yield a very low interest rate due to Germany's excellent credit rating.

At the same time, central banks are obliged to pay interest on short-term deposits of commercial banks at the current level. This was not a problem during the zero and negative interest rate phase. However, due to high inflation, the ECB then raised the key interest rates measured against the deposit rate from mid-2022 to mid-2023 at a speed probably never seen before, from -0.5 to 4 percent.

The deposit rate is currently only 2.75 percent due to five interest rate cuts since last June. Nevertheless, the central banks' costs for paying interest on commercial banks' deposits are still considerably higher than the income from government bonds.

The burdens are likely to remain very high in the coming years, but will slowly decrease, explained Bundesbank President Joachim Nagel and Vice President Sabine Mauderer to media representatives. On the one hand, the low-interest bonds in the portfolio will gradually expire. On the other hand, the interest costs for deposits of credit institutions should continue to decrease in view of the falling interest rate level.

The immense losses are nothing new for the Bundesbank. In the 1970s, the bank had to report cumulative balance sheet losses of a good 20 billion D-Marks and was therefore unable to transfer any profits to the government in Bonn for nine years. At that time, the Bundesbank operated with so-called loss carryforwards, which it then gradually reduced with later profits.

This is also the plan for this decade. The Deutsche Bundesbank transferred its last profit to Berlin in 2019. After that, the profits either went into building up provisions or there were no longer any operational provisions at all. This will remain the case in the coming years due to the mechanisms described above.

The International Monetary Fund expects that the federal government may not be able to make a profit again until 2032. President Nagel, however, did not want to comment specifically on the time horizon - among other things because the development of interest rates over such a long term is difficult to calculate.

During the phase of the trillion-dollar government bond purchases, finance ministers and taxpayers in the euro zone benefited from low interest rates. This enabled them to borrow extremely cheaply, among other things. At the time, the ECB wanted to combat what it saw as the danger of deflation and stimulate inflation through low key interest rates and massive securities purchases. But now the bill for this policy is coming in the form of significant losses.

Unlike commercial banks, however, it is not a major problem for central banks to report deficits running into billions for several years. In Sweden, however, the Reichsbank has already been recapitalized due to a different legal situation. However, this scenario is far from imminent in Germany.

One of the reasons for this is that the Bundesbank benefits from significant valuation reserves, especially in the price of gold. The bank has its gold holdings on its books at a much lower value than the current stock market price. This resulted in the Bundesbank's valuation reserves totaling 267 billion euros at the end of 2024.

In view of the federal government's empty coffers, Nagel also announced a new proposal from the Bundesbank to reform the debt brake . This is expected to be presented in less than two weeks. It is important that the debt brake remains anchored as a stability instrument, he said.

However, according to Nagel, Germany is in a different environment than it was 15 years ago when the debt brake was introduced. In Germany, pressure has long been mounting for reform in order to free investments in defense, infrastructure and climate protection from the perceived strict requirements of the debt brake.

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