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ECB bond purchases eat into Bundesbank profits

Thursday, February 23, 2017 - 23:07

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The Bundesbank said Thursday that its profits were cut drastically last year because it is having to set more aside in risk provisions to cover the European Central Bank's massive bond purchase programme.

[FRANKFURT] The Bundesbank said Thursday that its profits were cut drastically last year because it is having to set more aside in risk provisions to cover the European Central Bank's massive bond purchase programme.

And that could potentially have an effect on Germany's public finances, because the central bank traditionally pays its annual profits into the state coffers.

The Bundesbank said that its annual net profit amounted to one billion euros (S$1.494 billion) in 2016, compared with 3.2 billion euros the year before.

Of that total, 399 million euros would be handed over to the government, the lowest such transfer since 2004.

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That is bad news for the German finance ministry which had been pencilling in a profit transfer of 2.5 billion euros from the Bundesbank for its 2017 budget.

"The profit for the year is lower than in 2015 because the Bundesbank increased its risk provisioning," said its president, Jens Weidmann.

The provisions for general risks were upped by 1.8 billion euros to 15.4 billion euros.

Mr Weidmann attributed the development to "the interest rate risk arising from the growing stocks of assets held under the various monetary policy purchase programmes".

As one of the eurozone's central banks, the Bundesbank is involved in buying up vast amounts of bonds under a huge scheme known as quantitative easing aimed at pumping liquidity into the financial system to boost growth and inflation in the single currency area.

But as the pool of eligible bonds gradually becomes more scarce, central banks are increasingly having to buy up bonds with negative interests, effectively meaning they could take a loss on them when they reach maturity.

"For many years to come, the Bundesbank stands to earn only a very low rate of interest on the long-term securities acquired under the purchase programmes and on longer-term refinancing operations, while it might have to pay a higher rate on credit institutions' deposits in the future," Mr Weidmann explained.

"It's a completely new situation for us," he said.

Mr Weidmann has been openly critical of the ECB's QE programme in the past.

Nevertheless, "monetary policy decisions shouldn't be measured against central bank profits, but against the objective of price stability," Mr Weidmann insisted.

As for Germany's public finances, it is not clear yet exactly what effect the smaller transfer will have, a finance ministry spokesman said.

The shortfall did not mean that the public finances would fall back into the red, since Bundesbank profit transfer was equivalent to just 0.6 per cent of the anticipated revenues for 2017, the spokesman explained.

Earlier Thursday, official data showed that Germany notched up a surplus in its public finances of nearly 24 billion euros last year, its largest since reunification in 1990.

AFP

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