The Banque de France is starting this period in a relatively favourable position, which it had built up over the past few years. It was able to draw on its Fund for General Risks (EUR 16.4 billion at end-2022) to cover a gross loss of EUR 12.4 billion for 2023. It can also rely on revaluation reserves of at least EUR 18 billion that it could use in the coming years.
The disappearance of profits is neither a surprise nor a tragedy. Bear in mind that the goal of a central bank is to combat both inflation and deflation, not to make a profit. To achieve this objective, the Eurosystem eased monetary conditions considerably during the 2010s before tightening them rapidly as from 2022. As a result of this proactive policy, its profits rose sharply and then disappeared and this situation could last for several years.
Central bank accounts versus national accounts
The fact remains that the Banque de France will pay neither corporation tax nor dividends for 2023. The disappearance of payments to the state budget is a timely reminder that there is no such thing as magic money: when a central bank makes a loss, it doesn’t risk bankruptcy (because it does not depend on external financing), but it does cease to pay corporation tax and dividends. In some countries (notably Sweden), the central bank has even had to be recapitalised. Not only is the Riksbank not paying anything into the state budget for 2023, but around SEK 40 billion (around EUR 3.5 billion) has to be found in the budget to recapitalise the central bank as a result of losses in 2022, which caused equity to fall below the regulatory level (Riksbank, 2023, Riksbank 2024).
Even without sufficient reserves, euro area central banks would not need to be recapitalised: they would simply have to carry their losses forward until the return on their assets rose above that on their liabilities, allowing them to generate profits and increase their equity themselves. Indeed, this is how the Central Bank of Australia, which has negative equity, operates.
At the height of the health crisis, the Eurosystem increased its duration risk (“maturity mismatch” between assets and liabilities) by acquiring securities of all residual maturities, while its liabilities consisted of banknotes and short-term reserves. This policy has helped to bring down medium and long-term interest rates, and thus to support aggregate demand for goods and services and, ultimately, inflation, which, as we know, was at zero in 2020 (+0% year-on-year in December 2020 for the harmonised index, see Insee, 2021). It also benefited the state, which was able to borrow at a lower cost. In a way, the quantitative easing policy implemented as of 2015 transferred a duration risk from the state to the central bank, without any impact on the consolidated accounts of the central bank and its public shareholder.
The success or failure of a central bank cannot be measured by its accounting results, even if they are inter-temporal. We need to ask in particular how the euro area economy would have behaved if central banks, and in particular the ECB, had remained passive during the long period of very low inflation (2010s), during the pandemic (2020-21) and during the energy crisis (2022-23). Naturally, the answers to this counterfactual exercise are incomplete, but it is highly likely that the economy would have experienced deflation, followed by a degradation of its productive fabric, persistent inflation, and ultimately highly unstable inflation. But macroeconomic stability is more precious than central banks’ profits and losses. Bear in mind that each percentage point of GDP is worth EUR 26 billion to France, and that each inflation point not offset by an equivalent rise in wages reduces the purchasing power of household gross disposable income by EUR 16 billion (see INSEE, National Accounts 2022). In 2022 and 2023, the Eurosystem, like many central banks around the world, did not hesitate to raise its key rates rapidly, knowing full well that this would adversely affect the accounts of all euro area central banks. At a time when private currencies are becoming increasingly appealing, we must recall that only an independent central bank is capable of serving the public interest rather than the financial interests of its shareholders.
A transfer to the private sector?
Did the fight against inflation unduly benefit commercial banks? This is what Paul de Grauwe and Yuemei Ji have suggested in various opinion pieces. According to these authors, the rapid rise in returns on bank reserves has led to a transfer of resources from central banks to commercial banks, i.e. away from the state’s consolidated account with the central bank. In practice, during the period of quantitative easing, banks sold euro area central banks long-term sovereign bonds belonging to themselves or, more often, to banks outside the euro area and to non-bank customers. In return, they accumulated reserves at the central bank (and their customers accumulated deposits in their accounts). As from July 2022, commercial banks started to benefit from the fact that the rate of return on reserves rose at a faster pace than the return on other assets.
However, we should avoid looking only at a snapshot of 2023, but rather view the film as a whole since 2015. The return on banks’ excess reserves remained negative between 2015 and 2022. Thereafter, the increase in the return on bank reserves, on the assets side of commercial banks’ balance sheets, was accompanied by an increase in the return on household and business deposits, on the liabilities side. The increase in the cost of liabilities was particularly rapid in France because of the rules applying to interest on Livret A savings accounts. Before stabilising at 3% in the summer of 2023, this interest rate then led to an increase in rates on term deposits, and depositors transferred a substantial proportion of their sight deposits to these interest-bearing products (Chart 2).