Dutch central bank reports first loss since 1931 amid rising interest rates

De Nederlandsche Bank (DNB) suffered a loss of almost half a billion euros last year due to the sharp rise in interest rates. That is the first loss in more than ninety years, the Dutch central bank said in its annual report released on Thursday.

Significant losses are also expected for the coming years. The DNB does not expect to be able to achieve a profit again until 2028. DNB President Klaas Knot already warned about this scenario in September. Due to the higher interest rates, the central bank itself has lost more money, while yields have tumbled on bonds purchased in droves in recent years.

The last time the DNB suffered a loss was in 1931, when the central bank had to take a significant loss on British pounds after the United Kingdom left the gold standard.

Strictly speaking, the net result for 2022 was zero. But the DNB was only able to achieve that by withdrawing the 460 million euros from the institutions 11 billion euro buffer to cover the loss. As a result, DNB cannot pay dividends to the Dutch state.

In the coming years, the losses could increase to such an extent that the built-up buffers are no longer sufficient, and the State, as shareholder, has to step in. As it stands now, the DNB could end up in the red by more than 3 billion euros this year, and losses in the billions will probably also be seen in the following years.

“The higher interest rate ensures that the DNB pays more interest on the balances that commercial banks hold with DNB. While the income from holdings of government bonds, which have increased considerably as a result of the ECB’s purchase programmes, is not rising along with it,” the DNB said in a statement.

The central bank holds hundreds of billions of euros of debt securities on its balance sheet that were bought up in the aftermath of the financial crisis and during the coronavirus pandemic. However, the income from those bonds is low.

To some extent, the problems are similar to those of the Silicon Valley Bank which recently collapsed in the United States. “The difference is that they have not accrued a provision since 2015,” says Knot. There is also no risk of a bank run at the DNB.

The fact that interest rates are rising at an unprecedented rate is partly due to the European Central Bank (ECB), where Knot is one of the key policymakers. By raising interest rates, the ECB is trying to curb high inflation. According to Knot, the latter is more important than the DNB’s own results. “We are not going to take our mandate less seriously because of our own results.”

The DNB president estimates that if the losses turn out as they have now predicted, no additional money from the State will be needed, but he said there is no certainty in the matter. In any case, DNB’s clout will not be compromised, Knot said. Even still, the central bank could also easily go through a period of time with negative financial equity. He acknowledged that the situation is “not ideal”.