DNB almost makes a loss due to ECB emergency policy
It is a plus that the Ministry of Finance in Amsterdam has been able to count on every year: a few hundred million euros, sometimes a billion or more, flows into the treasury from the monetary pot of De Nederlandsche Bank (DNB) in Amsterdam. . DNB makes a profit from interest income and largely distributes that profit to the state, its sole shareholder.
But that automatic source of income for the state is coming under pressure, according to DNB’s annual report published on Monday. The reason: the crisis measures taken by the European Central Bank (ECB), which have a negative impact on DNB’s results. The monetary policy of the ECB, which DNB and the other national central banks implement, leads to lower interest income and higher risks for DNB. To do this, the bank has to build up valuable buffers, which reduce profits.
Over 2020, DNB made a very modest profit of 15 million euros. The year before, it was just under 1.2 billion euros. Loss cannot be ruled out in the coming years, according to the annual report.
No losses since 1947
Since 1947, DNB – an institution that likes to keep shareholders happy – has not suffered any losses. But the question is how long this will remain so. “Our profit prospects are not very bright,” Klaas Knot, the president of DNB, said in a press conference on Monday. “All it takes is one thing to happen and the profit can turn into a small loss.”
If DNB is going to make a loss in the coming years, the government will not have to supplement this. Over the years, the central bank has built up ample reserves, which it can draw on. Knot spoke of ‘firm buffers’.
Nevertheless, ECB policy makes it increasingly difficult for DNB to close its own profit and loss account. First of all, net interest income for DNB is falling. The ultra-cheap long-term loans that DNB provides to banks on behalf of the ECB until June 2022 have negative interest rates. It does not earn DNB any interest, but costs it interest on balance. “This is at the expense of our results,” according to the DNB annual report. The ‘pandemic emergency buybacks’ of government and corporate bonds by the ECB also have a negative impact on DNB’s results. The interest on the purchased loans is also negative on average. And so they are a cost item.
In addition, the ECB’s purchasing policy is subject to future risks. To compensate for this, DNB is already building up extra buffers – which are deducted from the profit. It mainly concerns an interest rate risk. The bonds with very low, often negative, interest rates remain on the DNB balance sheet for a long time, or are replaced when they expire. But the ECB may well increase the deposit rate it pays to banks in a few years’ time. It is now at minus 0.5 percent. The combination of low interest received and higher interest paid will lead to losses, for which a provision is required.
In the years 2015-2018, when the ECB’s buy-back program was running for the first time, DNB already set aside 500 million euros annually due to the interest rate risk. That was at the expense of profit in those years. In 2020, 868 million euros was added to the provision, due to the risks of the pandemic emergency buybacks.
“Our risk profile has increased enormously,” Knot said. Due to the purchase of bonds and the provision of long-term loans to banks, DNB’s balance sheet swelled further last year, from 301 to 452 billion euros. That’s the highest level ever. By way of comparison: the size of the Dutch economy was 745 billion euros in 2019. In fact, DNB would like to further strengthen the buffers to cover the risks, but this is impossible due to the low interest income. „This is unfortunate, but such is life”, zei Knot.
The Dutch state is missing out on dividend from DNB due to the ECB policy, but ‘The Hague’ benefits greatly from that policy in a different way. The purchase of government bonds, which was heavily ramped up during the corona crisis, is pushing down borrowing costs for governments. Thanks to the ECB, the Dutch government can finance the billions of debt that it is now building up very cheaply. The interest on ten-year Dutch government bonds is now minus 0.2 percent.
Correction (22 March 2021): an earlier version stated that DNB would have had to present red figures for 2020 if it had not benefited once from the sale of the former visitor center on Amsterdam’s Sarphatistraat (yield: 46 million euros). This sentence has been removed. A DNB spokesperson said that if DNB had not sold the visitor center, it would have deposited less money in the provision for monetary policy risks. The profit was therefore 15 million euros.