ECB reports another record annual loss, says it may suffer more losses

FRANKFURT (Reuters) - The European Central Bank reported another record annual loss on Thursday and said further, though somewhat smaller, losses were still possible as it pays out billions of euros to banks.

The ECB, which raised interest rates at an unprecedented pace in 2022 and 2023, still has a bloated balance sheet from long-concluded stimulus schemes, and commercial banks now earn hefty interest on the trillions of euros it printed during the era of anaemic inflation.

Interest rates have come down from their peaks and the ECB's balance sheet has also shrunk sharply, suggesting that the financial strain will diminish. But there is still almost 3 trillion euros worth of excess liquidity in the financial system, which could take years to run down.

The ECB made a loss of 7.94 billion euros in 2024, just up from 7.89 billion a year earlier, and this will remain on the balance sheet to be offset against future profits since the bank burnt through its provisions already in 2023.

"The ECB's losses in 2023 and 2024 ... reflect the role and necessary policy actions of the Eurosystem in fulfilling its primary mandate of maintaining price stability and have no impact on its ability to conduct effective monetary policy," the ECB said.

"The ECB may still incur losses in the coming years," the bank added. "Should this be the case, any such losses are expected to be lower than those incurred in 2023 and 2024."

On top of the losses related to previous stimulus, writedowns also jumped sevenfold to 269 million euros, mostly due to the decline in the market value of U.S. dollar instruments and the depreciation of the yen.

The ECB sits on just a fraction of the bonds purchased during stimulus schemes, commonly known as quantitative easing, and most bonds are held by the 20 national central banks across the currency bloc.

Of these, the Bundesbank will take the biggest hit but the central banks of the Netherlands and Belgium have also warned of large losses.

Unlike commercial banks, central banks can have depleted provisions and even negative equity with no impact on their ability to operate effectively.

However, these losses may raise credibility concerns and deprive governments of dividend earnings, a source of budget income in earlier periods.

(Reporting by Balazs Koranyi; Editing by Hugh Lawson)