The French central bank disclosed on Friday that it tapped into its risk provisions to absorb a pre-tax loss exceeding 12 billion euros ($13.06 billion) in the previous year.
This substantial loss was primarily attributed to the repercussions of elevated interest rates.
As central banks globally embarked on a tightening monetary policy by increasing interest rates, they encountered significant challenges, including increased interest payments on excess liquidity held by commercial banks.
The Bank of France was not immune to these global economic shifts, facing a considerable loss in its financial operations.
Global Trend of Central Bank Losses
The phenomenon of central banks facing losses has been observed worldwide as many institutions raised interest rates over the past couple of years.
These rate hikes led to significant interest payments on excess liquidity held by commercial banks, resulting in financial challenges for central banks.
The Bank of France’s experience reflects a broader trend across central banking institutions, highlighting the complex interplay between monetary policy decisions, financial markets, and economic conditions.
Proactive Measures by the Bank of France
In anticipation of such adverse scenarios, the Bank of France has been accumulating rainy-day provisions in recent years to mitigate potential losses. By the end of 2022, these provisions had amassed 16.4 billion euros.
These reserves were subsequently utilized to offset the pre-tax loss incurred in 2023, showcasing the prudence and foresight of the central bank’s risk management strategy.
The Bank of France’s proactive approach to building up reserves underscores its commitment to maintaining financial stability and resilience in the face of economic uncertainties.
Forward-Looking Approach
The central bank emphasized its commitment to addressing potential losses in the future by utilizing provisions and reserves. In the medium and long term, the bank anticipates that income from its bond portfolio and loans will increase.
Also, the favourable developments in interest rates are expected to facilitate a return to profitability and enable the rebuilding of reserves.
This forward-looking approach underscores the central bank’s resilience and strategic planning to navigate through challenging economic conditions.
By adapting its strategies and leveraging its financial resources, the Bank of France aims to ensure its continued effectiveness in fulfilling its monetary policy objectives and supporting economic growth.
