Germany's central bank reported its smallest profit in more than a decade in 2016 after setting aside a record amount of provisions against future losses on the bonds it is buying as part of the ECB's stimulus program, its annual report showed on Thursday. "It is fair to ask ... when we can take our foot off the monetary policy pedal," Bundesbank President Jens Weidmann said while presenting the report.
The Bundesbank recorded a net profit of 399 million euros (£337 million), the lowest since 2004 and far below the the €3.2 billion profit it booked in 2015. The fall was largely due to higher provisions against paper bought as part of the ECB's asset buying, which since June includes corporate bonds, and against cheap loans extended to banks.
More troubling for holders of European bonds, the Bundesbank increased its provisions for bond losses to €21.9 billion from €19.6 billion a year earlier, a harbinger of what is to come once the ECB starts pulling its foot off the pedal.
So far, however, the bank is making profits on its bond holdings. Ironically, the profit is mainly thanks to bonds from troubled countries such as Greece, bought at very high yields and against the opinion of Germany's own representative on the ECB's board, during the 2010-12 debt crisis. Of course, should Greece be forced to restructure its debt, all of the phantom, paper gains will be promptly wiped out as Greece bonds are repriced to reality.
By contrast, the predominantly German public sector paper bought as part of the asset-buying programme since 2015, some of which yields less than zero, resulted in a small loss for the Bundesbank.
"The purchases of long-term securities (at very low interest rates) for monetary policy purposes and the new targeted longer-term refinancing operations (four-year maturity at a negative interest rate) have given rise to ... mounting interest rate risk," the Bundesbank said in the report.
As Reuters points out, the drop in profit translates into a smaller contribution to Berlin's federal budget and, coupled with the threat of losses in the future, is likely to strengthen already sharp German criticism of the ECB's quantitative easing.
"Especially since the ultra-accommodative monetary policy is being implemented in key measure through the large-scale purchases of government bonds, which, as you know, I am very critical of."
And so the Bundesbank is trapped: permit Draghi to keep doing what he is doing and avoid losses, or demand action against the sudden spike in European inflation and suffer what even it now admits will be record MTM losses on bond holdings as rates start creeping higher.
Finally, among the many topics covered in the report is the Bundesbank's update on its gold transfers, which as discussed recently, it scrambled to accelerate years ahead of schedule:
The Bundesbank, as the central bank of Germany, is responsible for managing Germany’s reserve assets. These assets include the country’s gold holdings. In 2012, the Bundesbank decided that half of Germany’s gold reserves should be stored in its own vaults by 2020. This meant transferring gold from overseas storage locations to vaults located in Germany. The transport of 300 tonnes of gold from New York to Germany was completed in 2016. Of the 374 tonnes of gold originally stored in the vaults in Paris, only 91 tonnes are left; these holdings will be relocated in their entirety to Frankfurt am Main before the end of the current year.
One can't help but wonder that the imminent mark-to-market losses, and potential for European market and political turbulence, and the acceleration in gold repatriation are related.