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De Nederlandsche Bank (DNB) buffers are affected by the sharp rise in interest rates, says Bank President Knot. DNB expects billions of dollars in losses in the coming years. In the worst case, these losses must be met by the Dutch state (the sole shareholder of the DNB). This was stated in a letter from Knot to Finance Minister Kaag.
Knot writes that “the buffers that DNB has at its disposal can absorb significant shocks, but are not unlimited.” The buffer is currently worth over €11 billion.
In the decade leading up to the Corona pandemic, the DNB bought billions of corporate bonds to stimulate the faltering economy and boost low inflation. During the Corona pandemic, something similar happened to prop up the economy.
But the steep price increases in recent months have led to a reversal in monetary policy. Eurozone central banks are now trying to rein in inflation by raising interest rates, so that demand falls and prices fall. “DNB is facing the financial consequences of this transformation.”
9 billion losses
The central bank basically spends a lot of money on the fees the banks receive in exchange for the money they store with the central bank. These fees increase sharply due to higher interest rates. However, at the same time, income from purchased bonds remains low.
“We expect a limited loss for this year. But in the coming years, the expected cumulative losses will be significant,” Knot writes. It takes into account losses of about 9 billion euros between 2023 and 2026 due to higher interest rates.
In some scenarios, losses may increase further and buffers may run out. The central bank may be in a negative state for a short time, but not for long according to European rules. It is difficult to replenish the buffers yourself in the current conditions.
“However, if the deficit is too large or the expected earnings are too low, additional actions may be needed to restore a strong balance sheet,” warns Knot. “In the extreme case, a capital contribution from the shareholder may be necessary.” This is the Dutch country.
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