European banks report billions in losses

Central banks in Germany, the Netherlands and Poland face problems

The central banks of Germany, the Netherlands and Poland announce losses of billions of euros in 2023 and predict even bigger problems ahead. This raises doubts as to whether the banks will be able to pay dividends to the public treasury in the coming years^[1].

At the beginning of the year, the German central bank announced that it had made a loss of €21.6 billion last year.

"The financial burden is likely to persist for several years. We think it will be significant again this year," said Joachim Nagel, President of the German Central Bank.

The German central bank has not paid into the federal budget for several years, and it is expected that it will not do so in the future.

For its part, the Dutch central bank has announced a payment of €3.5 billion.

The Dutch central bank indicates that its reserves should be large enough to cover future losses and that a recapitalization of the government is not yet on the table, while the dividend to the state is said to be continuing for the time being^[2].

Somewhat unexpectedly, the National Bank of Poland also reported problems last week, with a loss of 20.8 billion zlotys, or 4675175000 euros, for 2023.

Domestic politics may also have something to do with this performance of the National Bank of Poland. When Poland's new ruling coalition came to power at the end of last year, it plotted to take the bank's CEO, Adam Glapinski, to a state tribunal.

The new government accused Glapinski of not being sufficiently independent of the previous nationalist government^[3].

He is also accused of breaking constitutional rules that prevented the bank from financing government borrowing during the COVID-19 pandemic, misleading the Ministry of Finance about the bank's performance and misrepresenting to the Ministry of Finance that the bank could make a profit of 6 billion zlotys in 2023.

ECB decisions related to bank losses

Central banks' losses were caused by the European Central Bank's (ECB) decade-long economic stimulus program.

The ECB printed trillions of euros of cash to stimulate economic growth, and much of this excess liquidity is still in the financial system^[4].

However, these losses do not limit the central bank's ability to operate because, unlike a commercial lender, it can continue to operate with negative equity capital. However, the problem becomes that losses by banks in different countries limit the ability to pay dividends to national budgets, which is an important source of revenue.

In addition, ECB losses can also strain markets. The ECB recently announced an annual loss of €1.3 billion in 2023. Overall, the institution lost as much as €1.3 billion last year. The losses would have been much higher if the ECB had not used the €6.6 billion set aside in the past to cover such losses.

The last time the ECB suffered losses was only in 2004, when it lost €1.6 billion, partly due to the weakness of the dollar and the yen.

The ECB now says it expects further losses over the next few years but that they will not affect its ability to conduct an effective monetary policy.

The US investment bank Morgan Stanley estimates that the losses of the ECB and the national central banks will increase further this year and only decrease in 2025^[5].

"We estimate losses for the euro system at €56.6 billion in 2023, €62.2 billion in 2024, and €12.3 billion in 2025," Morgan Stanley said in a statement.

ECB losses could affect the future of the economy

Holger Schmieding, chief economist at Berenberg, says the ECB's recent losses were entirely expected but are not a major problem.

"It will not affect monetary policy. There is no institution in the economy that can cope with temporary losses better than the central bank," he said.

However, the losses could also lead governments to question how the central bank operates, which could jeopardize its reputation.

While official bodies, from the International Monetary Fund (IMF) to the Organisation for Economic Co-operation and Development (OECD), argue that losses are not a sign of a policy error, this can be difficult for the general public to understand.

Governments across the euro area have benefited for decades from dividends from their central banks, so losses also reduce budget revenues. If losses have to be carried forward, as they are now, even future profits become unavailable to shareholders because the bank has to cover the losses first. This could undermine the credibility of the ECB.

Indeed, the Reserve Bank of Australia and the Czech National Bank already have negative equity, as does Germany. Some banks, including the Dutch central bank, are warning that negative equity cannot be sustained over the long term and may require government recapitalization. The non-eurozone Bank of Sweden has already stated that under its new statutes, it has to apply to Parliament for a recapitalization because its capital has fallen below the required threshold.

This only goes to show that a prolonged period of losses is certainly not an acceptable situation for the financial markets and the banking sector. This not only calls into question the sustainability of the system but also calls into question the political plans and long-term visions of financial institutions.