Bundesbank may need recapitalisation to cover bond-buying losses

Germany’s federal audit office has warned the Bundesbank may need a bailout to cover losses arising from the European Central Bank’s bond-buying scheme, potentially throwing a spanner in the ECB’s plans to carry out similar programmes in the future.

“The possible Bundesbank losses are substantial and could necessitate a recapitalisation of the [bank] with budgetary funds,” said the report by the audit office, the Bundesrechnungshof, which has been seen by the Financial Times.

Purchasing vast 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 launched its bond buying, but it was outvoted at the ECB. The audit office’s criticisms are likely to make a repeat of the policy more difficult, especially as some economists blame QE for stoking the recent wave of inflation.

The Bundesbank announced in March that it had suffered a €1bn hit from its bond holdings, as it grappled with the impact of higher interest rates. It also warned that future losses would wipe out 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 involved the bank purchasing €2.7tn worth of sovereign bonds of 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, coupled with the ECB’s sub-zero interest rates, pushed up the price of the bonds, meaning many of them yield negative rates. That means the Bundesbank is now being squeezed by the growing gap between the interest it pays to commercial banks on their deposits and what it earns on the bonds.

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

A Bundesbank spokesperson said its balance sheet was “sound even in the event of a loss carry-forward” because it had a “considerable amount of net equity”.

But Germany’s public finances will still be hit by the losses as the bank has stopped paying dividends to the government, depriving Berlin of an income stream amounting to €22bn in the past decade. The bank said dividends were not expected to resume for “an extended period of time”.

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

The government believed it was “highly unlikely” that losses from the Bundesbank’s monetary policy operations would “put a strain on the federal budget”, the ministry said.

In 2020, Germany’s constitutional court shocked European capitals by ruling that the German authorities and the EU’s top judges had failed to properly scrutinise the PSPP, in a move that threw the policy into doubt.

The spat was resolved when the ECB produced a “proportionality assessment” backed by the German government and the Bundesbank to justify its bond buying, as the judges in Karlsruhe had requested.

The report by the Bundesrechnungshof, Germany’s highest government audit authority, looked into whether the German government — and particularly the finance ministry — was fulfilling the obligations imposed on it by the constitutional court’s May 2020 ruling, including “continually monitoring” the actions of the ECB.

In the report, the audit office zeroed in on the risks posed to Germany’s public finances by the Bundesbank’s “monetary policy actions” and accused the finance ministry of failing to consider what effect Bundesbank losses might have on the budget.

“If the functioning of the Bundesbank is endangered by an inadequate or even negative net equity, the Federal Republic of Germany can be obliged to inject capital,” it said. “Depending on the extent and probability, the risks arising from monetary policy could, in the worst case, endanger the budgetary autonomy of the German Bundestag”.

The report called on the finance ministry to use “scenario analyses” to “regularly assess risks to the federal budget arising from the Bundesbank’s activities and inform the German Bundestag about them, in an appropriate manner”.

Antje Tillmann, a MP for the opposition Christian Democratic Union who serves on the Bundestag budget committee, said the Bundesbank had “so far been able to deal with the losses it has sustained using the risk provisioning built up in times of low interest rates.

“At the same time, we are very closely monitoring the situation around the dimension of the purchased bonds by the [national central banks of the eurozone] and would like to see a faster reduction in the holdings of bonds,” she added.