Central banks slip into the red: Swiss central bank reports huge loss

Central banks slip into the red
Swiss central bank reports huge loss

Only for the second time in its more than 100-year history has the Swiss National Bank reported a loss. The equivalent of 134 billion euros is the huge shortfall. The Bundesbank and other central banks are also preparing for billions in losses.

According to preliminary calculations, the Swiss National Bank (SNB) will report a loss of around CHF 132 billion (EUR 134 billion) for the 2022 financial year. It is only the second and by far the largest deficit in the 115-year history of the Swiss central bank, which usually pays sizeable profits to the Swiss cantons and the federal government year after year, thereby making a significant contribution to their budgets. For 2021, she had paid 6 billion francs to the federal government and the cantons. The SNB has now announced that no payout is possible for 2022 in view of the hole in the balance sheet.

Even if the size of the SNB loss stands out, the Swiss are not alone with their problem. In the course of the global turnaround in interest rates, central banks around the world expect large deficits. According to estimates, the European Central Bank and the central banks of the euro countries are likely to accumulate losses totaling more than 100 billion euros in the coming years. The US Federal Reserve is also heading for negative results that could add up to more than $100 billion within a few years.

The losses come as no surprise to central bankers. They even caused it themselves by raising interest rates: last year, however, the ECB, Fed & Co. sharply increased the interest rates they pay commercial banks on their deposits. On the other hand, however, the central banks are still sitting on bonds that they have bought up on a large scale as part of their extremely loose monetary policy. However, their low or – for example in the case of German government bonds – partially negative interest rates will not change for the time being. The result: the central banks have to pay the commercial banks more interest than they have earned.

Bundesbank has taken precautions

In addition, the value of paper and foreign exchange held by central banks has recently fallen significantly. This effect caused the SNB to take most of its loss. Since the outbreak of the euro crisis, the SNB has been fighting against an appreciation of the Swiss franc. To do this, she bought currencies such as dollars and euros and sold francs. At times, it had built up a foreign exchange reserve worth almost 950 billion francs. Despite the losses, the value of this reserve at the end of 2022 was still CHF 784 billion.

In contrast to commercial banks or other companies, such losses endanger neither the existence nor the ability to act of central banks, which can create the respective money themselves, even if the equity should be exhausted. In Australia, for example, the central bank completely used up its equity in 2022 due to its recent losses. Initially, however, this has no practical consequences.

Nevertheless, the central bank losses are bitter for the governments and taxpayers of the affected countries. Because most central banks usually transfer profits in the billions to the tax authorities. The German Bundesbank has even stopped transferring money to the Treasury in recent years. Since the losses associated with the turnaround in interest rates had been foreseeable for some time, or at least had to be feared, the Bundesbank used all of its profits from 2020 and 2021 to increase its reserves.

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