The Deutsche Bundesbank has officially announced record losses of €19.2 billion for the 2024 fiscal year, marking its first loss since 1979 and the highest loss ever recorded by Germany's central bank. During the announcement made by Bundesbank President Joachim Nagel, he highlighted how the monetary policy measures initiated by the European Central Bank (ECB) have impacted the financial outcomes.
"The peak of annual burdens appears to have been reached," Nagel stated at the press conference held in Frankfurt, outlining the difficult financial terrain the Bundesbank navigated over the past year. This loss reverses previous years' trends where the bank reported gains, particularly following its significant interventions during the pandemic to stabilize the economy.
Despite the loss, both Nagel and Bundesbank Vice-President Sabine Mauderer remain optimistic about the institution's ability to withstand these financial challenges. Mauderer noted, "The Bundesbank remains fully operational even with current losses." She emphasized the healthy state of the Bundesbank's balance sheet, backed by significant gold reserves valued at around €267 billion at the end of 2024.
The record losses stem from the rapid rise of interest rates initiated by the ECB, with key rates climbing to combat inflation. The ECB's shift began around the summer of 2022 when soaring inflation prompted substantial hikes. Consequently, the Bundesbank found itself burdened by the interest payments on its short-term liabilities failing to keep pace with the revenue generated by its low-yield long-term assets.
For the previous fiscal year (2023), the Bundesbank managed to narrowly avoid losses by drawing on provisions and reserves, which could no longer serve as a buffer going forward. By releasing all available provisions, they faced the bleak accumulation of losses for 2024 reported at €19.2 billion. The total loss was calculated after accounting for remaining reserves, which now stand at €0.7 billion.
According to Nagel, they had anticipated such outcomes, stating, "It is likely we will continue to experience losses for some time; significant efforts were made to offset them with potential future profits." Looking to the future, he did express hope, indicating, "It is expected the burden of our financial responsibilities will lessen going forward."
One of the major contributors to the Bundesbank's loss was its holdings of bonds acquired during the ECB's aggressive bond-buying programs aimed at stabilizing the economy during the COVID-19 pandemic. The once beneficial investments turned problematic as interest rates rose, reversing the financial gains from earlier years. With high holdings of lower-yielding government and corporate bonds, the change to costlier short-term deposits from commercial banks created significant pressure on the Bundesbank's overall earnings.
Mauderer explained the pressures on the financial statements succinctly: "We are witnessing considerable strains from changes brought to us by the interest rate shifts. The mix of low-yield long-term investments and high-interest short-term liabilities has led to these considerable losses. Our calculations indicate these losses will likely diminish over coming years as low-yield bonds mature and higher interest payments on deposits start to decrease."
The narrative may carry some resonance from the Bundesbank's experiences during the 1970s, where it faced losses for seven consecutive years. Yet, unlike those past years, Nagel expressed confidence: "The impact of our substantial asset base, particularly our rehabilitation of gold reserves, fortifies our financial standing, ensuring we can adhere to our mandates without interruption. We are equipped to weather these losses effectively."
The substantial holdings of the Bundesbank, including enhanced values of gold reserves—accounting for the resilience of its financial framework—were highlighted during the announcement. "The total value of the Bundesbank's reserves has risen from €197 billion the previous year to over €267 billion today. It's important to recognize this value should it be leveraged against incurred losses," Mauderer mentioned.
Past financial predictions valued at €2.5 billion are now fully revised, as the federal budget anticipated consistent dividends from the Bundesbank to shore up treasury finances; these expectations will need to adjust as the bank projects several more years without viable distributions due to continued deficits.
Current forecasts from analysts provide some cautious optimism. According to Jörg Krämer, chief economist at Commerzbank, "The notable losses stem from the ECB's earlier decision to purchase significant volumes of government bonds ... When interest rates rose, the Bundesbank found itself facing increased payments without the corresponding return from these valued assets. It is similar to homeowners suddenly faced with rising mortgage rates unexpectedly."
While experts like Clemens Fuest, director of Ifo Institute argue against excessive prescriptive measures, they maintain awareness of the financial imbalances experienced and stress upon the importance of monitoring performance carefully. Despite these adversities, the cumulative growth of net equity stands at €251 billion. This increase provides assurance of the bank's stability and capability to handle ups and downs, reinforcing the notion: the Bundesbank, even when compelled to post losses, remains fundamentally stable and future-focused.
Overall, as the Bundesbank tackles the repercussions of its current financial situation, it shows steady determination to extend its responsibilities, reaffirming its resilience even as it braces for unforeseen challenges going forward.