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Does the federal government have to step in at the Bundesbank?

In the course of the turnaround in interest rates, losses at the Bundesbank seem inevitable. According to media reports, the Federal Audit Office warns that the federal government may have to step in. The Bundesbank disagrees.

Detlev Landmesser

Since central banks in the eurozone have been actively buying bonds to support the European Central Bank’s (ECB) accommodative monetary policy, the risk profile of their balance sheets has changed. It is true that the risk of default appears low due to the high requirements placed on government, corporate and mortgage securities. However, the high bond holdings at the central banks are still subject to a high risk of price changes.

The reason for this is the historically unprecedented turnaround in interest rates, which has also led to a rapid rise in interest rates in Europe. New bonds are therefore issued with significantly higher interest promises. As a result, the older bonds with lower nominal interest rates (coupons) lose value accordingly.

This is also reflected in the balance sheets of the national central banks, which have accumulated billions in bond holdings on behalf of the ECB. In addition, the central banks now have to pay commercial banks interest on their deposits again, while at the same time the bond portfolios only yield low interest rates.

Does the federal government have to compensate for Bundesbank losses?

In this new constellation, losses by the Bundesbank have become more likely. In this case, the federal government would possibly be forced to compensate for the loss from the federal budget, i.e. from taxpayers’ money.

As the “Wirtschaftswoche” reported on Sunday, the Federal Audit Office warned of exactly this case in March. According to its own statements, the Federal Court of Auditors is not allowed to comment on the warning for legal reasons because its report is primarily based on data from the Bundesbank that is classified as confidential.

According to “Wirtschaftswoche”, the Bonn auditors also complained that the Federal Ministry of Finance had failed to critically question the ECB’s bond purchase decisions, as the Federal Constitutional Court had ordered.

“No recapitalization required by the federal government”

The Bundesbank stated that its balance sheet will probably be significantly burdened in the future by the rapid and sharp rise in interest rates in connection with the large bond portfolios. The institute had already used its risk provisions last year in order to avoid reporting a loss. The usual distribution to the federal government had failed for the third year in a row.

According to the Bundesbank, the financial buffers will probably still be sufficient in the current year. After that, the charges could actually temporarily exceed the buffers.

However, the central bank rejected the assumption that a recapitalization by the federal government would then be necessary: ​​In this case, it would report loss carryforwards, which it could offset with the help of future profits. Even if a loss is carried forward, the Bundesbank’s balance sheet is solid. It owns a considerable amount of its own funds, including valuation reserves. Bundesbank President Joachim Nagel had already declared in the autumn that it was not to be expected that the state would have to inject additional capital.

The Bundesbank had already been in the red for seven years in the 1970s when it had to write down its foreign currency holdings heavily after the collapse of the system of fixed exchange rates. However, the bank was able to offset these losses against later profits.

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