The European Central Bank made no profits for the first time in 15 years in 2022 after suffering writedowns on its bond investments, with analysts predicting years of losses following the reversal of its ultra-loose monetary policies.
The ECB said on Thursday it would have made an annual loss of more than €1.6bn if it had not drawn on the provisions it has built up in recent years to cover financial risks, adding it would scrap the dividend it usually pays to eurozone national monetary authorities.
Those dividends — amounting to €5.8bn since 2018 — are usually passed on by the national central banks to eurozone governments. Some national central banks, including those in the Netherlands and Belgium, have warned their governments that they expect to make significant losses.
Losses at the ECB and other central banks are likely to reignite the debate about aggressive monetary easing.
Since the global financial crisis, rate-setters around the world have bought vast amounts of bonds at ultra-high costs to counter low inflation and financial risks, but are now starting to shrink their balance sheets.
As rates rise, the interest central banks pay on commercial lenders’ reserves is likely to outstrip the interest earned on bonds bought under crisis-fighting programmes.
Daniel Gros, a fellow at the Centre for European Policy Studies think-tank, estimated that eurozone central banks including the ECB could suffer about €600bn of losses on their investments in government bonds, if interest rates rise to 3 per cent and stay there for six years.
The bank’s benchmark deposit rate has risen from minus 0.5 per cent last July to 2.5 per cent. Rate-setters have hinted it will hit 3 per cent in March.
“The ECB’s bet that interest rates would stay low is now backfiring,” said Gros. Critics are likely to seize on the losses to support legal challenges against the ECB’s bond-buying programme, with one case still pending in the German constitutional court.
Most analysts think these shortfalls should not matter as central banks do not aim to make profits and cannot go bust when they have the power to print money, earning revenue on the production of currency through a process called seigniorage.
“ECB losses should have next to no impact on the conduct of monetary policy unless it becomes a political issue,” said Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, adding that some parliaments could call for central banks to be recapitalised.
Ducrozet estimated the ECB would suffer €90bn of losses on the mismatch between the higher interest it pays to national central banks and the interest it earns on bonds in 2023 and again in 2024. The scale of losses would be lower if it cuts rates next year.
The ECB is yet to take any writedowns on the value of the €4.9tn of bonds it and national central banks bought under its QE programme, despite the value of government debt falling sharply last year. The bank does not mark these bonds to market. Instead it values them at cost, subject to an annual impairment test.
The Frankfurt-based institution has built up large buffers it can use to absorb future losses, including its €6.6bn provisions, €8.9bn of capital and €36bn of revaluation accounts stemming from unrealised gains on investments.
The last time the ECB made zero profits and distributed no dividends to the national central banks that are its shareholders was in 2007. Its last annual loss was in 2004 when it was hit by foreign exchange losses due to the rapid appreciation of the euro.