Research Briefing | May 10, 2023

Eurozone: Central bank losses will have a fiscal, not monetary, impact

Eurozone central banks became unprofitable last year, and near-term operational losses are likely to persist as banks exit the accommodative policies of the past decade. But while cash-strapped finance ministries may find it a headache, we don’t expect it to hurt the ECB’s ability to do its job.

What you will learn:

  • Estimates are highly uncertain but the Eurosystem could accumulate operational losses in the range of €150bn-€200bn (1.1%-1.5% of GDP) over the coming two years. This stems from the duration mismatch on its balance sheet. The return on long-term assets it holds – €4.9tn bond portfolio acquired through a series of QE programmes – is not rising in step with the interest paid on liabilities, primarily commercial banks’ deposits held at the central banks, as interest rates rise.
  • Notably, higher ECB interest rates will hit national central bank (NCB) profits unevenly. “Core” central banks – Bundesbank, National Bank of Belgium, and De Nederlandsche Bank – are more vulnerable to monetary policy tightening as their liabilities are skewed toward now-expensive commercial banks reserves and assets they hold are yielding relatively less. In contrast, the NCBs of Portugal, Greece, and Italy are better placed in the current environment.
  • That said, the ECB and NCBs have financial buffers worth 0.9% of GDP. Plus, accounting and profit-sharing conventions limit the impact of higher interest rates on NCB profits and balance sheets. And central banks’ position in the financial system allows them to operate even when faced with outright losses – but communicating this to limit credibility issues will be a challenge.
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