This topic will be discussed during the Amundi World Investment Forum
Since mid-2014, the Eurosystem (which consists of the Eurozone’s national central banks and the ECB) has been implementing unprecedented unconventional monetary policies (a massive asset purchase programme, negative interest rates and very long-term loans to banks). These decisions, on a scale that has not been seen before, raise questions about the direct costs and benefits they are creating for eurozone central banks. The recurring criticism of the ECB’s unconventional policies by members of the Bundesbank has led us to look at the bank’s annual reports and in particular on its profitability.
Bundesbank profits are on a steady downtrend
Chart 1 shows the annual net profit and loss for the eurozone’s four largest national central banks (Bundesbank, Banque de France, Banca d'Italia and Banco de España). We can see that they have all enjoyed positive P&L for the past ten years. That said, the amounts at stake are unimpressive: for 2014, the combined net profit of the four largest national central banks was only €10.5 bn (so far, we only have the figures from the Bundesbank for 2015). Moreover, the net profit of the central banks should be compared to the size of their balance sheets, which have ballooned in recent years as a result of the launch of an array of asset purchase programmes and long-term loans to banks (LTROs followed by the TLTROs). At the end of 2015, the Bundesbank’s balance sheet size stood at €1012 bn while its net profit accounted for €3.2 bn, i.e. only 0.3% of its total assets.
Like any bank, most of the central banks’ profits are derived from net interest margin, that is, the difference between interest income and interest expense. In Chart 2, we show net interest margin as a percentage of average assets. In 2015, the Bundesbank’s net interest margin was at its lowest level for more than 10 years. The net interest margin is even converging toward zero, which is not quite the case
A significant share of the Bundesbank's income comes from its Securities Market Programme
A detailed analysis of the Bundesbank’s interest income for 2015 reveals that nearly half comes from holding securities purchased under its Securities Market Programme (SMP), that is, sovereign bonds of the peripheral countries (Spain, Greece, Ireland, Italy and Portugal). Without the SMP, the Bundesbank’s net interest margin would have been even lower. The irony of the situation is that Jens Weidmann, the president of the Bundesbank, said in December 2011 that he was not “a fan of the SMP”. Furthermore, we note that the income from SMP securities has been steadily declining over the years and continues to fall as the securities gradually approach maturity (at the end of 2015, the Bundesbank still held €28 bn).
It is particularly striking to note that interest income derived from PSPP securities (holdings of €104 bn at the end of 2015) were negative for the 2015 income statement, standing at ‑€11 million. The Bundesbank earned €39 million from purchased securities with a positive yield-to-maturity and lost €50 million on purchased securities with a negative yield to maturity. Under the PSPP, the Bundesbank’s balance sheet is swelling with huge amounts of securities that are costing it money. Finally, the 2015 decision not to share the risks linked to the PSPP (only 20% of the risks linked to the PSPP are shared, see Box) is costing the Bundesbank quite a bit of money. Presumably, the PSPP is going to cost it even more because the German yield curve for maturities up to around eight years has been in negative territory since the beginning of 2016. We can easily understand the Bundesbank’s reluctance to accelerate QE asset purchases from €60 bn to €80 bn per month, which was decided on 10 March: according to our calculations, the Bundesbank’s PSPP purchases will increase from nearly €125 bn to €170 bn per year. Assuming that the ECB's QE programme is extended beyond March 2017, a shift in the structure of PSPP purchases away from German securities to the sovereign securities of other countries (France, Italy and Spain) would have a positive effect on the Bundesbank’s P&L account. However, Jens Weidmann has stated on several different occasions that the pooling of the risks related to sovereign bonds holdings would make sense only if budget oversight by the European authorities were increased.
Even if the Bundesbank, like all the other Eurosystem national central banks, does not formulate its policy with the express aim of profitability, we can well imagine that an analysis of the impacts of the main unconventional policies on its income statement could have influenced it in terms of its broad policy objectives. An analysis of the Bundesbank’s balance sheet and P&L accounts helps us understand why its president, Jens Weidman, recently reiterated his opposition to the PSPP.
Under the PSPP, the Bundesbank’s balance
The lowering of the deposit facility rate is expected to improve the Bundesbank's income statement