Bundesbank may need recapitalization to cover bond-buying losses

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Germany’s federal audit office has warned that the Bundesbank may need a bailout to cover losses from the European Central Bank’s bond-buying scheme, potentially threatening the ECB to run similar programs in the future. Can cause hindrance in plans.

“The potential Bundesbank losses are substantial and may require a recapitalization of (the bank) with budgeted funds,” said the report by the Bundesreichnungshof, the audit office, which has been seen by the Financial Times.

Buying large amounts of bonds to lower borrowing costs, known as quantitative easing, has long been controversial in Germany. The Bundesbank argued against it in 2015, when the eurozone’s central bank began its own bond purchases, but was overruled at the ECB. Criticisms from the Audit Office could make it more difficult to replicate the policy, especially as some economists blame QE for fueling the recent wave of inflation.

The Bundesbank announced in March that it had written off €1 billion on its bond holdings, as it grapples with the effects of higher interest rates. It also warned that future losses would erode its remaining financial buffers, though it denied it would need a government rescue.

The audit office report takes aim at the ECB’s public sector purchase programme, which was launched in 2015 and saw the bank buy €2.7tn worth of sovereign bonds from eurozone countries. The Bundesbank bought €666bn of German government debt under the scheme, which stopped buying more bonds last year.

The scale of the purchases, combined with the ECB’s sub-zero interest rates, drove up the price of bonds, meaning many of them yield negative rates. This means that the Bundesbank is now grappling with the growing gap between the interest paid to commercial banks on their deposits and the earnings on bonds.

The Bundesbank said in March that losses in future years would “likely” exceed its remaining €19.2 billion of provisions and €2.5 billion of capital. However, it has gold and foreign exchange reserves of €170 billion and can carry forward any further losses against future profits, as it did in the 1970s.

A Bundesbank spokeswoman said its balance sheet was “strong even in the event of further losses” as it held a “considerable amount of net equity”.

But Germany’s public finances will still be hit by the deficit as the bank stopped paying dividends to the government, leaving Berlin deprived of an income source of €22bn over the past decade. The bank said dividends are not expected to resume until an “extended period”.

In a statement, the German finance ministry said the Bundesrechtungshof had a “different assessment” of the risks to the budget arising from the Bundesbank’s actions.

The ministry said the government believes it is “highly unlikely” that losses from the Bundesbank’s monetary policy operations will “put pressure on the federal budget”.

In 2020, Germany’s constitutional court stunned European capitals by ruling that German officials and the EU’s top judge had failed to properly investigate the PSPP, which threw the policy into doubt.

The dispute was resolved when the ECB presented a “proportionality assessment” supported by the German government and the Bundesbank to justify its bond purchases, as requested by the judges in Karlsruhe.

The report by Germany’s highest government audit authority, the Bundesreichnungshof, looked into whether the German government – ​​and in particular the finance ministry – was meeting the obligations imposed on it by the Constitutional Court’s May 2020 ruling, in which the ECB “Continuous monitoring” of the actions of the ,

In the report, the audit office focused on the risks posed to Germany’s public finances by the Bundesbank’s “monetary policy actions” and accused the Ministry of Finance of failing to consider what impact the Bundesbank’s deficit might have on the budget Is.

It added, “If the functioning of the Bundesbank is threatened by insufficient or even negative net equity, the Federal Republic of Germany may be obliged to inject capital.” “Depending on the extent and likelihood, the risks arising from monetary policy could, in the worst case, threaten the budgetary autonomy of the German Bundestag”.

The report called on the Ministry of Finance to use “scenario analysis” to “regularly assess the risks to the federal budget arising from the activities of the Bundesbank and to inform about them to the German Bundestag in an appropriate manner”.

Antje Tillmann, an MP from the opposition Christian Democratic Union who serves on the Bundestag budget committee, said the Bundesbank “has so far been able to cover its losses by using the risk provisioning created in times of low interest rates.

“At the same time, we are monitoring very closely the situation around the magnitude of bond purchases by (national central banks of the eurozone) and would like to see a rapid reduction of bond holdings,” he added.