The Bundesbank posted a profit of €2.0 billion for the 2017 financial year, compared with €1.0 billion one year earlier. Following an allocation to the reserves, the remaining distributable profit of €1.9 billion (previous year: €0.4 billion) was transferred in full today to the Federal Government pursuant to section 27 number 2 of the Bundesbank Act (Bundesbankgesetz). "The accommodative monetary policy that was pursued in 2017 once again led to a considerable expansion of the Bundesbank’s balance sheet," Bundesbank President Jens Weidmann explained at Tuesday’s press conference presenting the Bank’s annual accounts, adding, "The higher volume of excess liquidity combined with negative deposit rates also drove up its profit." It would be wrong to benchmark the monetary policy decisions against the central bank’s profit or loss, he noted, remarking that the sole benchmark is whether monetary policy succeeds in preserving price stability.

Mounting interest rate risk prompted the Bundesbank to step up its provisions for general risk yet again, adding €1.1 billion to bring the total to €16.4 billion. "The continuation of the asset purchases has driven up the Bank’s interest rate risk," Mr Weidmann observed. The Bundesbank took interest rate risk into account for the first time in the 2016 financial year. It is caused by a growing balance sheet mismatch between long-term assets and short-term liabilities. The long-term assets purchased under the asset purchase programmes and longer-term refinancing operations will yield very low interest income for the Bundesbank for many years to come, while the income generated by the negative interest rates on deposits can quickly turn into interest expenditure if policy rates pick up.

Interest income strongly higher

Income from the negative interest rates on deposits grew by €1.8 billion last year to reach €3.2 billion, while interest income as a whole climbed by €1.5 billion to €5.2 billion. Given that interest expenditure rose slightly (by €0.6 billion to €1.0 billion), net interest income increased by a substantial €0.9 billion to €4.2 billion.

Another sharp rise in total assets

The accommodative monetary policy stance in 2017 led to an increase in the Bank’s total assets of more than €330 billion. "Total assets at the end of 2017 climbed to a new record of just over €1,700 billion," commented Carl-Ludwig Thiele, the Executive Board member responsible for accounting and controlling. He identified the asset purchases for monetary policy purposes and the liquidity inflows from other countries in Europe as the main factors driving the balance sheet expansion.

On the assets side, the stock of euro securities was up by €154 billion at €512 billion, while inflows of liquidity from other European countries swelled the Bank’s TARGET2 claim on the European Central Bank (ECB) by €153 billion to €907 billion. "The TARGET2 claim on the ECB has almost doubled within the space of three years," Mr Thiele explained.

On the liabilities side, the liabilities from monetary policy operations rose by €198 billion to €610 billion, while the euro balances of credit institutions and of resident and non-resident depositors were up by €98 billion at €321 billion, notably as a result of payments received in July on the accounts of the fund for financing nuclear waste disposal, and the higher holdings of foreign central banks.

Economic performance offers prospect of normalising monetary policy

Bundesbank President Jens Weidmann said that the economic performance in Germany and the euro area is very satisfactory. "The upswing now rests on a broad base everywhere," he remarked, seeing as the German economy grew by a seasonally and calendar-adjusted 2.5% last year and is now booming. "A similar growth rate is expected for this year," Mr Weidmann added.

In his view, the robust state of the euro area economy confirms the belief that inflation will move towards the inflation target of below, but close to, 2%. "I believe it is important to gradually and dependably reduce the degree of monetary policy accommodation when the outlook for price developments in the euro area permits us to do so," he stressed.