The German and Dutch central banks on Friday posted multi-billion euro losses for 2023 and predicted more financial pain ahead, suggesting that they are unlikely to pay dividends into state coffers for years to come.
The European Central Bank and some of its largest national affiliates are generating large losses, depleting provisions and much of their equity, as sharply higher interest rates force them to pay out billions in interest to commercial banks.
The Bundesbank said it lost 21.6 billion euros last year, wiping out nearly all of its provisions, while its Dutch counterpart lost 3.5 billion euros, both broadly in line with expectations.
“The financial burdens are likely to persist for several years,” Bundesbank President Joachim Nagel said. “We … expect them to be considerable again for the current year.”
The Bundesbank said the loss in 2023 had wiped out nearly all of its provisions and that a 2.4 billion euro portion of this loss would be covered from reserves.
In 2024 the German loss will exceed the remaining 0.7 billion euro reserves, so the Bundesbank will be forced to carry the losses forward, setting them aside to be offset by future profits.
“We therefore do not expect to be able to distribute any profit for a longer period of time,” Nagel added.
The Dutch central bank, meanwhile, said that its buffers should be big enough to cover future losses and a recapitalisation by the government is not being considered.
“Once we have sufficiently restored our buffers by retaining profits, we will resume dividend distributions to the Dutch State,” the central bank said.
Most of the losses are a result of the ECB’s decade-long stimulus programme from an era of excessively low inflation in the pre-pandemic era.
The ECB printed trillions of euros worth of cash to stimulate growth and most of that excess liquidity, 3.5 trillion euros, is still sloshing around the financial system.
The European Central Bank must now pay lenders a four per cent deposit rate when this is deposited back at the ECB, while the assets it bought, mostly government debt, yield much less.
Losses do not curtail a central bank’s ability to function as, unlike a commercial lender, it can carry on with negative equity. But losses do limit the ability to pay dividends into state budgets, a steady source of income for governments in the past, and open a central bank to criticism.
Morgan Stanley estimates that losses across the ECB and the national central banks, commonly called the Euro system, will rise further this year before a drop in 2025.
“We estimate that the Euro system will face losses of 56.6 billion euros in 2023, 62.2 billion euros in 2024 and 12.3 billion euros in 2025,” it said.
