In 2023, the Bank of Spain contracted the illness that afflicts the vast majority of central banks in the world. For the first time in its history, it was not able to generate profits and has only avoided loss after making a large provision, for 6,612 million euros, which leaves the net result at zero. There will therefore be no profit to transfer to the Public Treasury, which had systematically received profits from the Bank of Spain. Nothing to do with the 2,162.34 million euros of benefits that the central bank injected this year into the State against the 2022 financial year.
The cause of the collapse in the Bank of Spain's accounts is none other than the rise in interest rates, which has opened a wide gap between the institution's expenses and income. Specifically, 6,612 million euros, covered with provisions. The Bank of Spain has begun to pay much more for the deposits of financial entities, while the income it receives for the debt assets it has in its portfolio is much lower and will take time to rise. This is what central banks call “structural balance sheet risk,” a source of losses in the short and medium term for these institutions.
The zero profit of the Bank of Spain in 2023 is in fact the reverse of the long years of zero rates in the euro zone, in which the central banks did not remunerate but rather charged the banks for their liquidity, while hoarding their hands full of debt sovereign with very low interest rates. And with rates that have risen by 450 basis points between July 2022 and September 2023, the cost of remunerating banks has skyrocketed, while the coupon received for these debt assets is still low. Thus, as explained by the Bank of Spain, the remuneration of credit institutions' deposits, directly linked to interest rates, has meant an expense of 8,160 million euros in 2023, compared to 530 million in 2022, when the rise in the price of money had just begun. These deposits include the entities' current accounts at the Bank of Spain, in which they maintain the minimum reserves required to meet the cash needs of their clients, and overnight deposits constituted under the deposit facility. .
In 2022, the Bank of Spain had achieved an increase in its profit of 34.6% thanks to lower spending on remunerating these bank deposits and also to the positive rates on sovereign debt on the balance sheet. Faced with central banks with a high volume of debt with negative interest, the higher risk premium of Spanish sovereign debt still allowed in 2022 for income from sovereign debt to offset expenses by a large margin.
The current imbalance between the interest rate on assets and liabilities is “transitory”, according to the Bank of Spain. And it will decrease as the debt assets on the balance sheet are amortized or reinvested at the current higher market rates. But in 2024 the break-even point will not yet be reached. “It is reasonable to think that financial costs will remain above financial income this year as well,” says Governor Hernández de Cos in a blog published this Wednesday on the Bank of Spain website.
What implications then does it have for the Spanish economy that the Bank of Spain does not make profits? The most immediate is that it leaves the Treasury without the income that it has recurrently injected into it year after year throughout its history. It will happen against the results of 2023 and 2024, at least. In any case, the Bank of Spain has a large cushion that will not pose a threat to its financial strength. It has provisions of 26,847 million euros to cover future losses, after having used more than 6,600 million in 2023 of a cushion that in 2022 reached 33,000 million euros.
The absence of profits will not affect the ultimate objective of the Bank of Spain and, by extension, of the ECB, that of achieving price stability in the euro zone. “This policy is designed independently of the impact it may have on the financial results of the national central banks, given that whether or not an accounting profit is obtained does not affect their ability to execute monetary policy effectively,” says the Bank of Spain. “Our objective as a central bank is not to make profits, but to fulfill our mandate,” adds Hernández de Cos.
The big risk for central banks would be a wave of losses that would leave them with negative equity, which would require an injection of capital. In the case of the ECB, a contribution from each of the member countries of the euro zone. But central banks have a large cushion of provisions, built precisely during the years in which they charged banks for parking their liquidity. These provisions have avoided the Bank of Spain's losses this year and made it possible in 2022 in the case of the ECB, which thanks to them left its profit at zero in that year. In the 2023 accounts, the bank chaired by Christine Lagarde has however not been able to overcome the red numbers, the first in two decades. It drew on provisions of 6,620 million euros, but had losses of 1,266 million.
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