ECB monetary policy risk: Bundesbank without profit for the first time since 1979

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Sometimes the most important things come at the end.

It was the same with the presentation of the Bundesbank's annual balance sheet.

"The increased risk provisioning is the main reason why the Bundesbank is reporting a balanced annual result for 2020 and is not distributing a profit for the first time since 1979," said Bundesbank President Jens Weidmann.

In plain language: For the first time in more than 40 years, the Bundesbank has not generated a positive return.

In the previous year, the central bank had posted a profit of 5.9 billion euros.

The reason for the slump in profits is a massive increase in risk provisioning.

The risk provision was substantially increased by 2.4 billion euros and now stands at a record value of 18.8 billion euros.

The risks of the ECB's policy are now becoming apparent

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The unusual Bundesbank balance sheet is not only bad news for the finance minister, who does not receive any money from the currency authorities.

It also reveals the massive risks that the expansionary monetary policy of the European Central Bank (ECB) entails.

The first invoice of the monetary policy measures for the taxpayer is now presented.

Especially since the record risk provisions will obviously not even be sufficient: "This only partially covers the increase in risks in the past year," said Weidmann.

"We therefore expect a further increase in the risk provision for the current year, especially since a fundamental change in the risk situation is not to be expected."

So it looks rather bleak in terms of profits for the current year.

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The Bundesbank is in a kind of interest rate squeeze.

The monetary authorities are currently generating income through the penalty interest that the banks have to shell out on their deposits.

However, if key interest rates rise, this interest income can quickly turn into interest expenses.

The deposit rate for banks is currently still at minus 0.5 percent.

But it doesn't even have to lead to an increase in key interest rates.

The banks are repeatedly demanding higher exemptions for their deposits, on which the finance houses do not have to pay penalty interest.

But that would cause important income to be lost in one fell swoop.

At the same time, the Bundesbank earns next to no income from the government bonds it has bought.

After all, the interest rates on German government bonds are negative, in other words: if the Bundesbank buys new debt, it even has to pay money.

Source: WORLD infographic

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And so the 2020 annual result was negatively influenced primarily by increased interest expenses and decreased interest income.

The Bundesbank had to pay more interest expenses because the credit institutions were able to refinance more cheaply from it in the course of the emergency measures and made greater use of this refinancing.

In fact, as part of the so-called TLTRO program, the ECB decided that banks would be paid for their loans by the monetary authorities.

The money houses receive up to one percent for free.

At the same time, interest income fell because income from monetary policy securities portfolios and foreign exchange fell and the higher income from negative interest rates on deposits did not compensate for this decline.

The net interest income consequently fell to 2.9 billion euros, after 4.6 billion euros in the previous year.

The balance sheet total also rose to a new record high

The Bundesbank also set a dubious record for total assets.

This expanded by 42 percent in the past year due to the extensive support measures of monetary policy, faster than ever before.

“Not only is the rate of growth record-breaking, the balance sheet total of EUR 2.5 trillion is well above the previous high of 2018,” said Johannes Beermann, who is responsible for accounting and controlling on the Bundesbank's board of management.

At that time the balance sheet total was 1.8 trillion euros.

Due to the corona pandemic and the measures to contain it, the Bundesbank expects a setback for German economic growth in the current quarter.

However, this should be significantly weaker than the slump during the first wave in early 2020.

As soon as the protective measures were loosened step by step, the German economy could resume its recovery, Weidmann was confident: “Effective vaccines have been developed more quickly than was often expected.

If we manage to get the pandemic under control with their help, the German economy will recover permanently. "

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