Ducks in a row

A lot going on under the surface in European central banks 2022 accounts

The annual accounts for most of the National Central Banks (NCBs) that make up the European System of Central Banks (aka, the ECB system) have now been published. There’s a degree of turbulence in the NCB duckpond. It’s quite surprising the media hasn’t taken the time to look at the splashing about more closely. I’ll pick a few items of interest, based on idle interest rather than comprehensive analysis. A few sleepy members have yet to announce results (Luxembourg/Slovenia/Slovakia). But enough have revealed their results to get a reasonable feel for how different nationalities have fared and, just as importantly, how different nationalities approach presentation of P&L.

2022 was an important transition year for NCBs; a year in which they earned a great deal of net interest income yet simultaneously found the income and valuation rug pulled from under their feet. It’s fair to say the results for 2022 were wild ‘varied’ - much like the economic composition of the Eurozone itself. The results for 2023 are likely to uniformly poor across the board. But that’s for a future post.

Photo by Artem Labunsky on Unsplash

Overall, the total reported P&L (to date) amounts to a profit of nearly EUR5 billion though the differences between countries was large. That’s pretty impressive, given the circumstances. The largest declared profit was announced by Spain (EUR 2.4 billion). Only two countries declared a loss, with the prize for largest loss going Belgium (EUR 580 million). The Banca d’Italia declared a decent profit of EUR 2 billion, most of which was donated to the Italian Treasury, though the result was half the level of 2021. A large number of countries declared a P&L of EUR 0 and, just as with the metaphorical paddling duck, a lot goes on under the surface to achieve that impressive achievement.

Take the allocation of write-downs and transfers to/from provisions. The Bundesbank declared the only other actual loss, and also wrote down assets (mostly US bonds) by nearly EUR 1 billion, almost completely offset by a transfer from provision account - a practice followed (in bigger numbers) by the ECB itself. Altogether 10 out of the 17 NCBs to declare shifted money from provisions to cover losses. The Banque de France was the only NCB not to declare any write-down on holdings - though this may be due to allocation of losses to “revaluation reserves” which seems to lump together foreign assets with gold.

source: NCBs

Belgium seems to have approached the report with the attitude that its better to front-up. Without any transfers from provisions the National Bank of Belgium declared the largest loss of all ESCB banks, mostly caused by write-downs, yet it did not transfer any offsetting cash from provisions. Punchy! Maybe their saving their provisions for when things get truly ugly. Mostly transfers seem to have been matched to the write-downs, which makes sense. The Austrian central bank impressively achieved neither profit or loss while writing down a hefty EUR 1.35 billion of assets. In general, where transfers from provisions were made, they contributed a very significant proportion to total net income.

source: NCBs

Of the five NCBs that managed to declare a profit, all but one (Ireland) achieved this profit in large part due to the transfer of monetary income which arises from the payment of interest in proportion to the Capital Key. This is a complicated calculation, involving limits on interest of TARGET2 and comparison of size of Deposit accounts. In practice it meant Germany kinda paid EUR 2.2 billion into the system and Italy kinda took out EUR 2.4 billion - though this gets lost in the overall splashing in the Eurosystem pond. Given the shift above zero rates, this particular monetary eddy may swirl very differently in the 2023 accounts.

In a future post I may pick the accounts of one particular NCB (not saying which) to have a real gander at the moving parts. If it was a corporate entity reporting there may be some eye-brows raised at the AGM. But that’s for another time.