The European Central Bank (ECB) made a zero profit in 2022 (€192 million in 2021) after running provisions of €1.6 billion to cover losses, meaning it will not distribute profits to central banks for the first time since 2007.
“This result takes into account the amount of 1.627 billion euros applied from the provision for financial risks to cover losses incurred during the year,” the ECB said in a statement on Thursday.
This is the first loss since 2004, when the euro’s appreciation against the dollar led to the ECB making a net loss of 1.636 billion euros, compared with a net loss of 477 million euros in 2003.
The rapid and aggressive interest rate hikes now being undertaken by the ECB and many other central banks around the world to curb inflation have resulted in an increase in the interest expense paid to commercial banks.
This interest expenditure is higher than the coupon income from the debt on the ECB’s balance sheet.
At the same time, rising interest rates reduce the value of the large amount of bonds that the ECB bought over the years when interest rates were even negative.
The ECB is not the only central bank that made losses in 2022, the Federal Reserve (Fed), too.
One of the most spectacular was the Swiss National Bank’s 2022 losses of 132 billion francs (about 133.6 billion euros), the highest in its 115-year history due to falling stock and bond prices and the appreciation of the Swiss franc.
The ECB’s losses were mainly due to interest expenses related to the ECB’s net TARGET2 liabilities and unrealised losses on securities held in the ECB’s own funds and US dollar portfolios.
TARGET2 (Trans-European Automated Real-time Gross settlement Express Transfer system 2) is a system that moves money between banks.
It is used by central banks and commercial banks to process euro payments and move money between them.
Central banks and commercial banks have accounts in TARGET2.
After deducting €1,627 million, the provision for financial risks was reduced to €6,566 million, the ECB said.
Net interest income fell to €0.9 billion in 2022 (€1,566 million in 2021).
The main cause of the decrease was interest expenses on the ECB’s net TARGET2 liabilities, which stood at €2,075 million (€22 million interest income in 2021).
In addition, unrealised losses amounted to €1.84 billion (€133 million in 2021), as a result of unrealised price losses on securities held in the equity and US dollar portfolios due to higher bond yields after the ECB and the Fed raised interest rates.
The Bank for International Settlements (BIS), which assists central banks around the world, recently said they do not need to be in profit to function.
“Losses and negative capital do not directly affect the ability of central banks to operate effectively,” BIS economists said in a recently published report.
“In normal times and in crises, central banks should be judged on whether they fulfil their mandates,” the BIS adds.