Reserves are getting smaller
ECB must make up for its own losses
2/23/2023, 5:38 p.m
The European Central Bank is in the red and has to balance its balance sheet with on-board funds. In return, the central banks in the common currency area get nothing – they do not receive a check from Frankfurt. The reason for this is billions in write-downs on the bond portfolio.
The central banks of the euro countries cannot count on money from the profit of the European Central Bank (ECB) this year. Because the currency watchdogs posted a loss of billions due to high interest payments and write-downs on securities. To cover the losses, the ECB used 1.63 billion euros from its reserves. In 2022, the bottom line was just a black zero. The year before, the annual surplus of the euro central bank had shrunk significantly to 192 million euros.
The ECB always distributes its profits in full to the national central banks of the euro countries. With Croatia joining the monetary union at the beginning of the year, 20 national central banks are now part of it. The ECB and several national euro central banks had already warned of possible balance sheet losses.
The Bundesbank has announced that it currently still has sufficient reserves. In the coming years, however, the reserves would gradually be used up, said Bundesbank President Joachim Nagel recently. There will therefore be years in which there is a high probability of being in the red. Nagel had said last fall that it was not to be expected that the state would have to inject capital.
The interest rate turnaround also affects the ECB
The ECB implemented the turnaround in interest rates last July after years of ultra-loose monetary policy. The background is the massive rise in inflation. In the USA, the US Federal Reserve initiated the tightening course earlier in the fight against high inflation. The ECB has already raised its key interest rate five times in just a few months. For the next interest rate meeting on March 16, it announced another rate hike of 0.5 points.
The turnaround in interest rates is now reflected in the ECB’s own balance sheet. So she made high write-downs on bonds in her so-called own funds portfolio and in her US dollar portfolio. The prices of these papers have fallen in the course of the tightening course – their yields, on the other hand, have risen. However, the bond portfolios acquired under the major bond purchase programs are not affected. These are recognized at amortized cost. In addition, there were extensive interest payments in connection with the Target 2 clearing system of the central banks in the euro zone, which are related to the increase in the key interest rate.
After using part of its risk provisioning, the ECB still has a provision for financial risks of 6.6 billion euros. Its capital is 8.9 billion euros – plus so-called revaluation accounts of 36.1 billion euros. The financial resources of the ECB totaled 51.6 billion euros at the end of 2022.
The ECB achieved interest income of 900 million euros last year – a decline of almost 43 percent within a year. On the other hand, depreciation shot up to 1.84 billion euros after only 133 million euros in the previous year. In 2022, the ECB balance sheet increased by a total of 19 billion euros to 699 billion euros.