Germany's central bank earned €2 billion more than it spent last year, doubling its profit compared with the previous year and contributing a nice windfall to the government budget after a meagre 2016.
The German Bundesbank on Tuesday reported a total surplus of €4.2 billion ($5.1 billion) for 2017, which was about €900 million more than in the previous year of 2016.
After setting aside €1.9 billion for "general risk provision" and deducting interest expenditure to the tune of €1 billion, the central bank announced it would transfer €1.9 billion to the German Federal Treasury. The remaining €100 million of the surplus flowed back into the reserve fund for pension obligations, the Bundesbank stated in its report for the 2017 fiscal year.
The contribution to the government budget was far more than in 2016, when the Bundesbank only provided €399 million to state coffers.
Bundesbank President Jens Weidmann said the "higher volume of liquidity," which was created through the European Central Bank's (ECB's) bond buying program, combined with negative interest rates on deposits held by commercial banks with the ECB had driven up the profit.
Bounce in interest income
The Bundesbank's profit is partly attributable to the redistribution of profits made by the ECB. The central bank for the euro area in recent years has resorted to a policy of massively injecting cash into financial markets in order to foster growth and fight chronically low inflation in the eurozone.
The financial stimulus also included lowering interest rates to historic lows of zero percent, and imposing negative interest rates on cash held by commercial banks in ECB accounts. As a result, the Bundesbank earned €3.2 billion from negative interest rates in 2017, €1.8 billion more than in 2016.
Interest income as a whole reached €5.2 billion last year, climbing by €1.5 billion compared with the year before.
Balance sheet risks
As the Bundesbank is part of the euro system, the ECB's ultra-loose monetary policy stance also increased the German central bank's balance sheet.
"Total assets at the end of 2017 climbed to a new record of just over €1,700 billion," said Carl-Ludwig Thiele, the executive board member responsible for accounting and controlling — an increase of more than €330 billion.
As a result, the bank identified a "growing mismatch" between its long-term assets and short-term liabilities, which is why it added another €1.1 billion to its risk management fund to bring it to a total of €16.4 billion. "The continuation of the asset purchases has driven up the Bank's interest rate risk," President Weidmann said in the report.
In 2016, the German central bank made such provisions for the first time as it expects "very low interest income" from the ECB's asset purchases and the income generated from negative rates in deposits to turn "quickly" into expenditure if interest rates pick up.
uhe/aos (dpa, Bundesbank)