The Bundesbank posted a profit of €2.5 billion for the 2018 financial year, representing a year-on-year increase of €0.5 billion. Following allocation to the reserves, distributable profit totalled €2.4 billion. This was transferred in full to the Federal Government. “This rise is driven by higher interest income due to the negative interest rates on increased deposits,” explained Bundesbank President Jens Weidmann at the press conference presenting the Bank’s annual accounts in Frankfurt am Main. Net interest income rose significantly, up from €4.2 billion to €4.9 billion.

Risk provisioning ramped up

The German central bank raised its risk provisioning for the third time in a row last year. General risk provisions were increased by an additional €1.475 billion, bringing the total to €17.9 billion. The main reason for the renewed increase was interest rate risk, which has been taken into account in risk provisioning since 2016, writes the Bundesbank in its Annual Report. This interest rate risk is the risk of income generated by the interest rates on deposits diminishing and turning into interest expenditure if policy rates pick up again in future. However, the Bank has substantial holdings of low interest-bearing security investments, some of which have very long residual maturities, meaning that income on the assets side will remain low in the longer term even in the event of a policy rate hike.

Further rise in TARGET2 claims

The Bundesbank’s total assets reached a record high of €1.8 trillion in 2018. All in all, they have increased by more than €1 trillion over the past four years, which equates to growth of 140%. Bundesbank Executive Board member Johannes Beermann, whose responsibilities include overseeing accounting and controlling, identified the monetary policy asset purchase programmes as the main factor driving the balance sheet expansion. In net terms, the stock of euro securities rose by €59.7 billion to €571.8 billion. Mr Beermann cited TARGET2 claims on the European Central Bank (ECB) as the second factor behind the balance sheet expansion. These increased by €59.2 billion to €966.2 billion in 2018.

On the liabilities side of the balance sheet, the euro balances of resident and non-resident depositors, in particular, were by up by €87.4 billion to €408.6 billion. Liabilities from monetary policy operations decreased by €37 billion to €572.8 billion.

Dip in growth set to continue

Bundesbank President Jens Weidmann noted that economic development in Germany, in the euro area and throughout the globe lost momentum last year, with plenty to suggest that the dip in growth in Germany will continue into this year. “The German economy will therefore probably grow at well below the potential rate of 1½% in 2019,” he commented. However, looking at the labour market, which remains in excellent shape, he warned against taking too pessimistic a view of the economy. The bad news should not be allowed to overshadow the fact that growth is solidly underpinned by favourable financing conditions, rising employment levels and increasing wages. “The economy is unlikely to go into reverse; it will probably just not accelerate as quickly in 2019,” he remarked. The German economy grew by a calendar-adjusted 1.5% in 2018.

First step towards a normalisation

The President of the Bundesbank also addressed last year’s monetary policy developments at the press conference. He described the ECB Governing Council’s decision to cease net asset purchases at the end of 2018 as “the first step in the long process of gradually normalising monetary policy”. Mr Weidmann remarked that euro area monetary policy remains exceptionally accommodative, with principal payments from maturing bonds being reinvested in full, keeping the total volume of securities high. In addition, the ECB Governing Council expects the key interest rates to remain at their present levels at least through the summer of 2019, and in any case for as long as necessary.

Regarding the debate about the possibility of a new series of targeted longer-term refinancing operations (TLTROs) for euro area banks, Mr Weidmann commented that this would have to be justified from a monetary policy perspective and that regulatory considerations should not play a role here. He added that any new TLTROs should be less generous than those currently maturing. “Our aim must always be to keep the markets functioning smoothly and to avoid taking the place of the capital markets,” said the Bundesbank President with respect to the loans’ very long maturity period.

Weidmann nominated for second term of office

As announced on the day of the press conference, the Federal Government has paved the way for the President of the Bundesbank to spend a second term in office. The government has proposed to Germany’s Federal President that Mr Weidmann again be appointed to the role. “I am delighted by the government’s decision and the chance to continue participating in the monetary policy debate,” said Mr Weidmann, whose term expires at the end of April. After consulting the Bundesbank’s Executive Board, the Federal President can appoint Mr Weidmann President of the Bundesbank for another eight years.