As European banks publish their financial results containing record profits, the ECB ends up in the red for the first time in the last 20 years. It seems like a paradox but it isn't. Indeed, besides not being a surprise to anyone, the two issues are closely linked. Because if there really is the basis of the profits of private banks the increase in interest rates established by the ECB to slow down inflation, the fight against high prices and the tightening of monetary policy are what caused the losses of the institution led by Christine Lagarde.
The ECB ends 2023 in the red
After a substantially balanced 2022, 2023 ended for the ECB with a loss of 1,266 billion euros. To find a precedent you have to go back 20 years to that 2004 which closed with a red of 1,6 billion of euros due to the devaluation of foreign currency reserves as a result of the sharp strengthening of the euro which reached above 1,36 against the dollar.
But how did the ECB end up in the red? This is explained by the central institute itself, according to which the increase in interest rates established to combat inflation has led to an increase in interest expenditure on the ECB's liabilities remunerated at variable rates, in particular those linked to Target towards the national central banks which purchase securities on behalf of the Eurosystem. In parallel, the interest income received by the ECB has not increased to the same extent or at the same pace, since the assets are mainly long-term and fixed rates.
“The loss, which almost follows two decades of consistent profits, reflects the role and necessary actions of the Eurosystem in fulfilling the primary mandate of maintaining price stability and has no impact on the ability to conduct an effective monetary policy,” commented the ECB.
ECB: the risk fund covered 6,62 billion in losses
The loss recorded in 2023, Eurotower says, will be reported in the balance sheet to be compensated with the future profits with the "roll over" technique also used by the Federal Reserve, the Bank of Canada, the Australian Central Bank and other central banks. Red takes into account the full release of the financial risk fund, equal to 6,62 billion euros, which partially covered the losses suffered during the year. The overall loss, without using the provisions, would therefore have been equal to 7,88 billion euros. The financial risk fund, with this disbursement, was completely eliminated.
The ECB's losses also have an effect on the various national central banks of the Euro Area which this year will not receive any distribution of profits from the European Central Bank.
ECB: new losses in the coming years
However, 2023 will not be unique. The ECB expects to suffer new losses in the years to come which should in any case be lower than those reported for 2023 (i.e. 7,88 billion, not considering the use of provisions) in consideration of the reduction in the cost of money expected starting in the next few months which affects the valuation of the securities on the balance sheet.
Nothing to worry about, however also because the ECB's mandate is not to make profits but to pursue the objective of price stability. In any case, profits will return and be sustained, as happened between 2005 and 2021, when overall, for 17 years, the ECB reported and distributed profits of around 23 billion euros, Eurotower reassures.
