The European Central Bank revealed a significant annual deficit for 2023, marking its largest loss to date. This trend is expected to continue due to its aggressive interest rate hikes, necessitating substantial payouts to banks.
This monetary institution, which has swiftly increased rates over the past couple of years, finds itself with an inflated balance sheet following a decade of financial stimulus. Commercial banks now profit from the substantial interest on the trillions of euros injected into the system during a period of sluggish inflation.
Despite these losses, the ECB emphasizes that they stem from its essential role and necessary policy actions in maintaining price stability, affirming no impact on its capacity for effective monetary policy.
Pre-provision losses for the Eurosystem amounted to 7.9 billion euros for the year, following a 1.6 billion euro deficit in 2022. After accounting for risk provisions, a net loss of 1.3 billion euros is anticipated, to be offset against future profits.
The ECB reassures that it remains well-capitalized and capable of operational effectiveness despite incurred losses. However, it anticipates further losses in the coming years due to interest rate risks before a return to sustained profitability.
While unlike commercial banks, a central bank can function with diminished provisions or even negative equity, such losses raise concerns regarding credibility, impact government dividend earnings, and may influence discussions on operational frameworks.
At the crux of the issue lies the ECB’s extensive money printing endeavors, a cornerstone of its stimulus strategies under former President Mario Draghi. The bank’s purchase of government bonds aimed to stimulate economic growth and elevate inflation to 2%. Initially inexpensive due to negative interest rates, the current 4% interest rate on these funds now burdens the ECB.
Commercial banks retain a substantial excess liquidity of 3.5 trillion euros across the euro zone, posing a challenge to extract without causing instability, potentially extending over a decade.
In contrast, the ECB’s earnings from the bonds purchased during the stimulus are modest, exacerbated by the sharp decline in their value since acquisition. Despite this risk, the ECB refrains from adjusting their value, citing their hold until maturity, fixed coupons, and lengthy durations.
Asserting its ability to maintain price stability despite losses, the ECB underscores its resilience in fulfilling its primary mandate.
