The European Central Bank closed the fiscal year 2022 with a net profit of zero euros, after covering losses with 1.627 billion from its buffer against financial risks. Massive purchases of member states’ debt and interest payments to commercial banks deteriorated the valuation of its balance sheet assets to an unsustainable level.

The European Central Bank (ECB) and the national central banks of the Eurozone countries generate income from several sources. These sources include interest on loans granted to commercial banks, interest on bonds purchased under asset purchase initiatives, and income from reserves and foreign currency investments. All these components represent assets retained by the national central banks and the ECB.

By contrast, banknotes in circulation constitute an important part of central banks’ non-interest-bearing liabilities and serve as the basis for their seigniorage income. Likewise, the deposits that commercial banks hold with the ECB represent a significant liability that is part of their monetary policy, generating interest payments for the banks, but an expense for the ECB.

In this context, the European Central Bank recorded losses due to its own interest rate hikes to combat inflation, which forced some bonds to depreciate in value and caused billions of euros to be paid out on balances created during a decade of monetary issuance. The ECB therefore faces huge interest payments to commercial banks for deposits created by massive bond purchases and cheap loans.

A dwindling piggy bank

Although the ECB still has reserves totalling 6.6 billion, a capital of 8.9 billion, and a revaluation account of 36.1 billion intended to cover market losses, these provisions could quickly run out if monetary policy is not changed.

The ECB could ask the national central banks of the Eurozone for an additional capital injection, in other words, we would pay the relevant financial contribution to the ECB with our taxes, but this could call into question its credibility and financial independence. On the other hand, unlike in previous years and as a consequence of the lack of profits, it will not transfer any profits to the national central banks of the Eurozone, which will also not pass on profits to their respective states.

Likewise, Eurozone member states will have to replace the ECB’s debt purchases through domestic banks, foreign investors and individuals to finance their sovereign debt, which may push up interest rates on the national bonds of the weakest economies. A scenario that is often accompanied by structural reforms, imposed by the ECB itself, at the taxpayer’s expense.

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