Ben Bernanke one said that the problem with QE is it works in practice, but not in theory.The latter point, much debated in academic circles at the time, centres on the fact that QE was an asset swap -the Central Bank bought bonds, largely Government debt, which paid a fixed interest rate, and paid the commercial bank sellers a floating rate on the reserves created to finance the purchase. So, it was argued, it was a zero sum game, with either side of the swap gaining and losing at any one time depending on the interest rate cycle.<\/p>\n\n\n\n
Central banks made large profits for years, because the rates paid on reserves were near zero and in the euro area were negative, falling to -0.5% at one stage. This allowed central banks in may cases to transfer a large portion of these profits to their respective governments.The flip side, for Euro banks in particular, was a big hit to their net interest margin, as they were effectively paying the ECB to deposit money , with reserves swollen by ongoing QE, then augmented by the PEPP operation.<\/p>\n\n\n\n
The ECB initially argued that credit growth would offset the negative impact on NIM but eventually became concerned about the impact on banks , eventually introducing a long term loan to banks at a rate below the deposit facility rate (TLTRO III) ,amounting to a profit subsidy.<\/p>\n\n\n\n
The onset of the tightening cycle has changed the profit\/loss dynamic however. The ECB’s deposit rate, for example, has risen by 4.5%, to 4%, since July 2022, so Central Banks across the zone are now faced with paying out far more in interest than they receive on the bonds they hold, which in some cases carry a negative rate anyway. The Bundesbank’s annual results makes this starkly clear; their interest income in 2023 was \u20ac55bn against interest expense of \u20ac69bn and with staff costs and other expenses the loss would have been \u20ac21.6bn, had they not transferred \u20ac19bn from provisions and \u20ac2.4bn from reserves. So no transfer of profits to the German Government and another loss is expected this year, which will wipe out the remaining reserves, with losses carried forward until eventually offset by future profits.<\/p>\n\n\n\n
The Irish Central Bank has already flagged the probability of losses, particularly as it was making large profits from the sales of its IBRC linked bonds but have now sold the full complement. The Bank still owns \u20ac67bn of Irish Government bonds acquired through PEPP and QE, receiving relatively low fixed rates, while currently paying 4% on the \u20ac90bn held by Irish banks in the deposit facility( or \u20ac3.6bn a year). In some years the Central Bank was transferring \u20ac2bn or more from its profits to the Exchequer (not much commented on, oddly enough) but that will be zero this year and no doubt for some time to come . <\/p>\n\n\n\n
<\/p>\n","protected":false},"excerpt":{"rendered":"
Ben Bernanke one said that the problem with QE is it works in practice, but not in theory.The latter point, much debated in academic circles at the time, centres on the fact that QE was an asset swap -the Central Bank bought bonds, largely Government debt, which paid a fixed interest rate, and paid the … Continue reading “QE Legacy: big losses for Central Banks, big profits for commercial banks”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[19],"tags":[],"class_list":["post-322","post","type-post","status-publish","format-standard","hentry","category-irish-banking-sytem"],"_links":{"self":[{"href":"https:\/\/danmclaughlin.ie\/index.php?rest_route=\/wp\/v2\/posts\/322","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/danmclaughlin.ie\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/danmclaughlin.ie\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/danmclaughlin.ie\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/danmclaughlin.ie\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=322"}],"version-history":[{"count":2,"href":"https:\/\/danmclaughlin.ie\/index.php?rest_route=\/wp\/v2\/posts\/322\/revisions"}],"predecessor-version":[{"id":324,"href":"https:\/\/danmclaughlin.ie\/index.php?rest_route=\/wp\/v2\/posts\/322\/revisions\/324"}],"wp:attachment":[{"href":"https:\/\/danmclaughlin.ie\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=322"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/danmclaughlin.ie\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=322"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/danmclaughlin.ie\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=322"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}