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/Pogled.info/ They counted and burst into tears…
The central banks of all countries are now summarizing the results of the past year. And some of them have already completed their summary. If we talk about the leading Western central banks, these results are disappointing. I mean above all the financial results, which are usually expressed by the words “profit” or “loss”.
For almost all of them, the financial result of last year is expressed by the word “losses”. However, there is no special feeling. Losses were expected. Moreover, last year a number of central banks already recorded such losses based on the results of 2022. I have written about this several times.
For example, more than a year ago, the article “Federal Reserve Losses” stated that starting in September 2022, the US central bank (US Federal Reserve) recorded losses on a monthly basis. It is true that at the end of the entire year 2022, the financial result of the Federal Reserve was positive – a profit of 58.4 billion dollars.
However, on the back of 2021 earnings ($107.9 billion), earnings were down 45.9%. It is not by chance that American experts, commenting on these figures, predicted that by the end of 2023 the Federal Reserve will have a negative financial result.
Bank of England, Swiss National Bank, Reserve Bank of Australia, Bank of France, Bundesbank and a number of others also received negative financial results at the end of 2022. Thus, the Dutch central bank (DNB) reported losses of around half a billion euros in 2022. due to the sharp rise in interest rates. This figure is its worst since 1931.
The Swiss central bank stood out, with 2022 losses estimated at 132 billion Swiss francs (equivalent to 143 billion US dollars), the highest in the bank’s 115-year history.
By comparison, in 2021 the SNB had a profit of 26 billion Swiss francs. The loss for 2022 significantly exceeds the previous record set in 2016 of 23 billion Swiss francs. The loss of the National Bank for 2022 amounts to a gigantic amount, equal to approximately 18% of the country’s GDP
Many central banks managed to end 2022 with a positive financial result, but almost all of them (such as the US Federal Reserve) saw a sharp decline in their profits compared to previous years.
The reason for this trend is the same – the sharp deterioration of the financial results of the Central Bank was generated by a sharp transition of the central banks from the “dove” monetary policy to the “hawk” one. This transition became clear in the spring of 2022.
Previously, central banks followed a policy of increasing the money supply at extremely low key interest rates (in 2020-2022, this was justified by the need to adapt the economy to the conditions of the so-called covid pandemic).
But in the spring of 2022, when the “pandemic” ended suddenly and world inflation also began to rise sharply (allegedly provoked by Russia, which began the SVO in Ukraine), central banks suddenly changed their monetary policy. Now they started trying to compress the money supply and set a course to raise key interest rates.
During a fairly long period of dovish policies (which began in 2008 at the height of the global financial crisis), central banks piled up Treasuries in their assets that had very low interest rates. At the same time, the Central Bank’s portfolios are dominated by “long” securities (ie those with a long maturity).
When the transition to hawkish policy began in 2022, interest rates on central bank deposits began to rapidly align with rising prime rates, but interest income on government securities in the central bank’s portfolios remained low.
The interest margin, i.e. the difference between interest income on assets and interest payments on deposits, began to decrease, then became zero and then completely negative. This became the reason for the negative financial results of the Central Bank, which in 2022 were not always manifested in all central banks.
But in 2023, experts predicted that losses would become the norm in the world of central banks. Because the securities in central bank assets are mostly “long-term,” central banks cannot quickly shake off losses. Consequently, losses were projected for 2024 and beyond.
And in February-March of this year, data on the financial results of the leading central banks for 2023 began to come out – in some places they were final, and in others preliminary, predictive. On March 26, Bloomberg published the article Fed’s Operating Losses Swelled to Record $114.3 Billion in 2023. The headline itself mentions the US central bank’s loss figure of $114.3 billion.
It appears that for the first time in the 110-year history of the Federal Reserve, the annual financial result has a minus sign, and the minus. is very significant. More than double the previous year. The article explains that the Fed’s earnings from its bond holdings totaled $163.8 billion last year, little changed from 2022.
But interest costs on the US central bank’s passive operations have soared. Interest payments on banks’ reserve balances last year reached $176.8 billion, up from $60.4 billion in 2022, and interest payments on the reverse repo line (can be seen as a short-term loan of funds backed by securities – bonds , bills, certificates of deposit , – owned by the selling bank) last year totaled $104.3 billion compared to $41.9 billion a year earlier.
There are no usual earnings transfers from the US central bank and, it seems, there won’t be for years to come. The Federal Reserve introduced the concept of “deferred assets”. Relatively speaking, this is the “desired fat” that will need to be accumulated in order for the Federal Reserve’s “body” to function properly.
At the end of 2023, deferred assets were identified at $133.3 billion. As of March 20, 2024, that figure has grown to $157.8 billion, and it’s unclear how much more it will increase. When the Fed returns to profitability, it will use excess earnings to reduce deferred assets, and when they are paid off, the Fed will begin returning excess earnings to the Treasury again.
The Bloomberg article in question notes: “Last year’s St. Louis Fed report suggested it could be years before the Fed returns earnings to the government again.”
The figure for the financial result for 2023 of the Swiss central bank/NBS/ has already been published. It is negative again, the loss is estimated at 3.2 billion francs. In fairness, it should be said that the record loss of NBSH for 2022 is mainly due not to the disappearance of the positive interest margin as a result of the increase in the prime rate, but to other factors.
First, the Swiss National Bank had a lot of holdings in their assets (which is not typical of most central banks), and their exchange rate had fallen sharply the previous year. Second, the overvalued Swiss franc factor came into play.
Without going into details, I will say that in 2023 it was possible to significantly weaken the effect of both negative factors, which led to a significant financial recovery of NBsh. However, it was not possible to get rid of the losses.
This year (as well as the previous one), the NBSH said that due to the loss, it will not be able to pay dividends to shareholders for 2023, as well as transfer funds to the Swiss federal budget and cantonal budgets.
Preliminary data has already arrived for the Dutch Central Bank (DNB). It reported a loss in 2023 of 3.5 billion euros. DNB said it expected further losses until 2029, which it said it could absorb from its reserves. “This means that the recapitalization of the Dutch state as an alternative to the restoration of reserves is not currently being considered,” the Dutch central bank said.
The Bundesbank said it lost a whopping 21.6 billion euros last year. German Central Bank President Joachim Nagel noted that financial difficulties could last several years and expected significant losses in the current year of 2024.
He said the losses incurred by the bank in 2023 have almost completely exhausted its financial capacity and part of it will be covered by reserves. Due to the current difficult situation, in 2024 the losses of the German central bank will exceed the remaining reserves by 0.7 billion euros, making the payment of dividends impossible in the long term.
The European Central Bank (ECB) also reported a loss for last year in the amount of 1.3 billion euros. And this is after the ECB used 6.6 billion euros of reserves to cover financial risks. Last year’s loss was the ECB’s first in almost two decades.
The ECB’s press release provides an explanation for the losses that have become typical of many central banks: “The rise in key ECB interest rates to fight inflation in the euro area led to an increase in interest costs on the ECB’s floating-rate liabilities.” said the press release.
„However, interest income on the ECB’s assets has not increased to the same extent or speed, as these assets largely have fixed interest rates and long maturities.“
The press release also notes that the ECB will not pay dividends to eurozone central banks based on last year’s results. I note that in 2018-2022 they amount to 5.8 billion euros (national central banks usually transfer these dividends to their countries’ budgets).
Britain’s Financial Times notes: The ECB expects losses over the next few years, after which it expects to return to stable profits.
But it was not possible to find exact figures for the Bank of England. It is true that the report of the relevant committee of the British Parliament, called Quantitative Tightening, published in February this year, says the following: “The annual losses of [Bank of England] in 2023 and 2024 will be £40bn, wiping out a total of £124bn of positive cash flow that has been created by September 2022.”
A natural question arises: can central banks exist with negative financial results? Central bankers reassure the public that they can. Of course, not forever, but a year or two or three. After all, they have formed reserves in advance to cover various types of risks, including losses.
It is true that some central banks admit that their reserves are already close to being depleted. I mentioned above a similar admission made by the Bundesbank. What if reserves run out and losses still continue? Then we will have to resort to the help of the state, its budget money.
And there is such a precedent. Last July, the UK government transferred £14.3 billion ($18.3 billion) to the Bank of England, the largest ever government transfer to a bank, to cover the shortfall in its monetary stimulus program. So far, there is no information about another central bank covering its losses from the state treasury.
By the way, the above-mentioned report of the British Parliament notes that in just seven years until 2030, taxpayers will have to transfer about 220 billion British pounds sterling to the Bank of England.
If the central bank’s losses continue for a few more years, other countries may follow the UK’s lead. The probable scheme for support of the Central Bank is as follows: the state receives money for such support from the same Central Bank, which buys debt securities of the Ministry of Finance; The state then transfers this money to the central bank to cover the latter’s losses.
Beautiful chart! It is true that such government support for central banks will inevitably accelerate already high inflation. This is the price to be paid for the enjoyment of “quantitative easing” that continued with brief interruptions from 2008 to 2022.
Translation: ES
