De Nederlandsche Bank (DNB) suffered a loss of almost half a billion euros last year due to the sharp rise in interest rates, it reports in its annual report.
Substantial losses are also expected for the coming years. The central bank does not expect to be able to make a profit again until 2028.
In the coming years, the losses could increase to such an extent that the State, as shareholder, has to step in.
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De Nederlandsche Bank (DNB) suffered a loss of almost half a billion euros last year due to the sharp rise in interest rates. That is the first loss in more than ninety years.
Substantial losses are also expected for the coming years. The central bank does not expect to be able to make a profit again until 2028, DNB reports in its annual report published on Thursday.
This is a scenario that DNB president Klaas Knot already warned about in September. Due to the higher interest rates, the central bank itself has lost more money, while bonds that have been bought up in recent years have stopped yielding.
The last time DNB suffered a loss was in 1931, when the central bank had to take a significant loss on British pounds after the United Kingdom left the gold standard.
Strictly speaking, the net result for 2022 was zero. But DNB was only able to do that by withdrawing the EUR 460 million that the institution was actually short of from the previously built up buffers of more than EUR 11 billion. As a result, DNB cannot pay dividends to the Dutch state.
In the coming years, the losses could increase to such an extent that the built-up buffers are no longer sufficient and the State, as shareholder, must step in to help. As it stands now, DNB could end up in the red with more than EUR 3 billion this year, and losses of billions will probably also be involved in the following years.
Fighting inflation remains a priority
The pain is particularly felt in the fees that DNB pays to banks for their money that they store at the central bank. They rise sharply due to higher interest rates. At the same time, DNB has hundreds of billions of euros worth of debt securities on its balance sheet that were bought up in the aftermath of the financial crisis and during the corona pandemic. But the income from those bonds is low.
To some extent, the problems are similar to those of the US Silicon Valley Bank that recently collapsed. “The difference is that they have not accrued a provision since 2015,” says Knot. There is also no risk of a bank run at DNB.
The fact that interest rates are rising “unprecedentedly” is partly due to the European Central Bank (ECB), where Knot is one of the policymakers. By raising interest rates, the ECB is trying to curb high inflation. According to Knot, the latter is more important than its own results. “We are not going to take our mandate less seriously because of our own results.”
The DNB president estimates that if the losses turn out as they are now predicted, no additional money from the State will be needed. But he’s not quite sure. In any case, according to Knot, DNB’s clout will not be compromised. The central bank could also easily go through a period of time with negative financial equity. He acknowledges that the situation is “not ideal”.