The Central Bank has set aside €165 million to deal with potential losses arising from the European Central Bank’s multibillion-euro bond-buying programme.
The Central Bank has bought government bonds and commercial debt as part of the ECB’s quantitative easing (QE) programme. This involves central banks in the eurozone buying debt to improve liquidity for bonds and injecting money into the banking system. This, in turn, drives down interest rates and makes loans cheaper.
The scheme is designed to allow businesses and consumers to borrow more easily and spend less to repay their debts in order to drive investment and consumption, and tackle low inflation.
Banks across the eurozone have increased the assets held on their balance sheets from €1 trillion to €4.2 trillion over the past decade, largely as a result of the QE programmes. However, the scheme has increased central banks’ interest rate risk. As their debts are generally subject to variable interest rates but most of their assets have been bought at fixed low-interest rates in recent years, regulators are exposed to a higher level of risk.
When central banks raise interest rates, the money they owe others will increase, but the income stream to pay those liabilities will remain at low fixed rates.
In response to the elevated level of “interest rate mismatch”, the Central Bank of Ireland set aside €165 million in last year’s annual accounts to deal with the potential loss. In the event that the risks are not realised, the provisions will be released and added back to future profit and loss statements, it said.
“While the policy rates are currently zero or negative, the difference between these and the yields on purchased bonds does not pose an immediate concern when aggregate holdings are taken into account,” the Bank’s annual report stated. “However, as economic conditions normalise over time, and the rate of inflation approaches the Eurosystem’s target, policy rates are also expected to increase.”
The Central Bank made a profit of €2.3 billion last year, €1.8 billion of which is paid to the Exchequer.
The Bank’s retained earnings are used as a buffer against future losses and risks. Sharon Donnery, the deputy governor, criticised the Central Bank Act which requires 80 per cent of the regulator’s profits to be transferred to the state. In a research paper by Ms Donnery and three colleagues, published yesterday, the authors said that legislation “limits the Bank’s ability to create financial buffers in a speedy manner, particularly where material new risks develop quickly”.
In May Philip Lane, governor of the Central Bank, said its high level of profitability was driven primarily by legacy issues such as interest income earned on the special portfolio acquired as a result of the liquidation of the Irish Bank Resolution Corporation. He said the Bank’s profits would return to more modest levels in future.
In April the ECB scaled back its QE programme from bond purchases of €80 billion a month to €60 billion.