The monetary policy turnaround shaped the Bundesbank’s balance sheet last year. The profit and loss account for 2022 reported a distributable profit of zero. This result was achieved by tapping €1 billion worth of risk provisions. As in the previous years, no profit was transferred to the Federal budget. “The Bundesbank sustained exceptional financial burdens in 2022,” Bundesbank President Joachim Nagel explained with regard to the annual accounts.

The Bundesbank’s balance sheet is sound

The burdens on the Bundesbank’s profit and loss account are likely to increase considerably in the years to come owing to the high holdings of securities and the interest rate reversal. “Earnings developments now and in the coming years are ultimately the result of the exceptionally accommodative monetary policy of the past few years. Now, a tight monetary policy is needed in order to restore price stability in a timely manner,” Mr Nagel explained. If this entails strains on the balance sheet, we will have to cope with them, and we will be able to cope with them. The burdens will pass, and we will subsequently make profits again.

Nagel sees need for decisive monetary policy

Inflation rose sharply throughout the euro area last year. “2022 will go down in Germany’s economic history as a year of one of the highest inflation rates since the foundation of the Federal Republic,” Mr Nagel said. As measured by the Harmonised Index of Consumer Prices (HICP), prices rose by 8.7%. He stressed that inflation had already been accelerating prior to Russia’s attack on Ukraine; with the war and its repercussions, inflation then picked up considerably. And underlying price pressures remain very high in the euro area as well as in Germany, Mr Nagel added.

“We therefore need a monetary policy in which action is decisive and the necessary steps are taken to restore price stability,” Mr Nagel said. He referred to the interest rate steps that had already taken place. Since July 2022, the Governing Council of the ECB has raised key interest rates by a total of 300 basis points and has signalled an increase by a further 50 basis points for March. “Further significant interest rate steps might even be necessary afterwards, too,” the Bundesbank President said. “People see that we have taken decisive action. And they are expecting us to continue to act decisively until we have done our job.”

Interest rate reversal with different effects

“The turnaround in interest rates has set a great many things in motion,” said Joachim Wuermeling, the Deutsche Bundesbank Executive Board member responsible for accounting and controlling. At the Bundesbank, the interest rate hikes are reflected on both sides of the balance sheet. In a structure that is as complex and highly interwoven as a central bank, their impact fundamentally transforms many components. “Our profit and loss account for 2022 bears testament to this complexity,” Mr Wuermeling said.

Net interest income, the most important item of the profit and loss account, increased last year from €2.5 billion to €4 billion. However, the net result of financial operations is being weighed down by the rise in US yields. Foreign currency-denominated securities saw write-downs from valuation losses amounting to €0.9 billion and realised losses of €0.8 billion. Furthermore, the rise in euro area policy rates had created additional burdens because the Bundesbank has been paying higher interest rates on the deposits held with it by commercial banks. At the same time, income from what continue to be very sizeable portfolios of bonds has remained relatively stable. “The Bundesbank has repeatedly pointed out the financial risks associated with the extensive asset purchases,” Mr Nagel added.

Balance sheet reduction has begun

In 2022, the Bundesbank’s total assets fell by €108 billion, or 4%, to €2.9 trillion. The main reason for the reduction on the assets side was the decline in refinancing operations by €184 billion (to €238 billion). The targeted longer-term refinancing operations (TLTRO III) were repaid ahead of schedule, in particular. By contrast, as a result of asset purchases under monetary policy purchase programmes, the corresponding holdings of euro-denominated securities increased by €45 billion (to €1.07 trillion) in the first half of the year.

On the liabilities side, there was a marked decline in general government and foreign central bank deposit holdings, which caused the euro-denominated balances of domestic and foreign depositors to fall by €198 billion to €533 billion. By contrast, liabilities to credit institutions related to monetary policy operations increased by €62 billion to €1.20 trillion.