Central banking in challenging times

The Oesterreichische Nationalbank (OeNB) presents its financial statements and Annual Report 2022

“2022 presented policymakers, businesses and the general public with a host of challenges. We had to deal with the repercussions from the coronavirus pandemic, the war in Ukraine and its major impact on safeguarding energy and raw materials supply, the resulting surge in inflation, as well as the need to address energy transition and climate change. In these times of demanding change, the Eurosystem – and the OeNB as its member – proceeded with caution in view of mounting inflation pressures, making a gradual exit from accommodative policies in the course of 2022,” Robert Holzmann, Governor of the Oesterreichische Nationalbank (OeNB), said today during the presentation of the OeNB’s 2022 financial statements and Annual Report.

Yet, successive rounds of key interest rate increases that were called for to combat high inflation put pressure on the profit and loss accounts of central banks across the globe in 2022 – including those of the European Central Bank (ECB) and the OeNB. And the situation is unlikely to change in the years ahead. Amid rising interest rates, central banks risk incurring losses when their expenses for remunerating deposits from commercial banks exceed the interest rate income they are able to generate with their portfolios of fixed-income, low-yield assets (which results in a so-called asset liability mismatch). “It is important to stress that monetary policy decisions are taken with the aim of maintaining price stability over the medium term. Any profit or loss recorded by Eurosystem central banks is thus a corollary to the underlying mandate and the monetary policies adopted to fulfill this mandate,” Governor Holzmann continued.

OeNB records balanced operating profit and first decrease in total assets since 2014
“The OeNB’s profit and loss account for 2022 was weighed down not only by monetary tightening after years of monetary easing but also by market and price developments. The interest rate reversal proved a turning point for balance sheet developments,” OeNB Executive Director Thomas Steiner explained when presenting details on the OeNB’s balance sheet and profit and loss account.

In the closing balance sheet for 2022, the amount of total assets was below the amount of total assets in the opening balance sheet. This is a development last seen in 2014. Compared with the closing balance sheet for 2021, the OeNB’s total assets had dropped by EUR 14 billion, or 5%, to EUR 261 billion. On the asset side, these developments reflect above all the declining volume of targeted longer-term refinancing operations (TLTROs III). From fall 2019 to December 2021, the Eurosystem offered TLTRO III funding at three-year maturities, with strong take-up from Austrian credit institutions. The first repayments became due in fall 2022, with some banks opting for early redemptions. In fall 2022, the volume of credit institutions’ deposits, which are recorded on the liabilities side, started to decline in parallel.

The OeNB’s profit and loss account for 2022 clearly reflects the impact of the interest rate turnaround. At –EUR 289 million in 2022, the OeNB for the first time recorded negative net interest income. Since the zero interest rate policy ended in the second half of 2022, there has been an asset liability mismatch, driven by the interest rate differential between low interest income locked in for longer periods on the asset side and high interest expenses on the liabilities side. Specifically, the portfolio of securities held for monetary policy purposes generated a comparatively low amount of interest income (EUR 209 million), well below the interest expenses for the funds deposited by credit institutions on central bank accounts (EUR 429 million). Until July 2022, deposits had continued to make a positive contribution to net interest income in the amount of EUR 287 million, given the prevailing negative interest rates on excess minimum reserves and the deposit facility. However, interest expenses due in 2022 on the TLTRO III operations were shaving EUR 426 million off interest income.

On top of that, market developments resulted in very high write-downs on securities and foreign currency holdings (EUR 1,349 million) and losses realized following security price changes (EUR 584 million). To offset these losses, the OeNB transferred EUR 1,934 million from the risk provision it has for years been steadily building up from income generated with the investment of capital and reserves. Tapping into provisions, to top up the significant income received from the pooling and redistribution of monetary income within the Eurosystem (EUR 281 million) and from subsidiaries (EUR 101 million), enabled the OeNB to achieve a balanced operating profit for 2022 (EUR 0). By extension, there is no profit to be distributed to the Austrian government.

Strong GDP growth in Austria in 2022, weaker outlook for 2023
Following pandemic-related lockdown measures, the Austrian economy benefited from pent-up demand in the first half of 2022. From mid-2022 onward, however, economic growth slumped significantly as the world economy slowed down on account of the war in Ukraine and the highly uncertain outlook for future geopolitics and economic development. For 2022 as a whole, at just under 5%, the Austrian economy nonetheless recorded very strong economic growth that even exceeded pre-pandemic GDP levels. For 2023, in contrast, the OeNB expects only very moderate growth, echoing the latest economic outlook published by the European Commission and reflecting weak export demand and shrinking household income and business investment.

Monetary policy battles high inflation pressure: gradual interest rate increases since July 2022
The war in Ukraine has been driving a further surge in international energy prices, following the initial rise in commodity prices during the post-pandemic recovery. Across the euro area, inflation rates thus increased substantially in the course of 2022, reaching levels well beyond the Eurosystem’s price stability objective of 2%. The Eurosystem did respond to rampant inflation, but given the high level of uncertainty, the monetary policy response was cautious in the first half of 2022. As an initial step, the Governing Council of the ECB lowered the monthly volume of net purchases under the pandemic emergency purchase programme (PEPP) and then stopped the purchases in March 2022. Starting from July 1, 2022, purchases under the asset purchase programme (APP) were discontinued as well. In a second step, the Governing Council of the ECB raised each of the three key interest rates for the euro area by a total of 250 basis points until the end of the year, at a pace unseen ever since European monetary union was created in 1999. Further interest rate increases, by 0.5 percentage points each, followed in February and March 2023. Since March 22, 2023, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility have stood at 3.50%, 3.75% and 3.00%, respectively.

Looking ahead, it is reassuring to note that both crude oil and gas prices are already past their peak. Overall, the OeNB therefore expects HICP inflation in Austria to decline from 8.6% in 2022 to 6.8% in 2023. Thereafter, headline inflation is expected to keep going down, to 3.9% in 2024 and to 2.9% 2025, but it will still remain well above 2.0%. According to forecasts, core inflation (which excludes energy and food) will rise further, namely to 6.1% in 2023 but fall to 3.9% in 2024 and 3.2% and 2025, respectively. Again, this will be well above the long-term average of 1.7% measured for the period from 1999 to 2019.

Austrian banking system remains resilient in challenging environment
Forward-looking microprudential supervision and the macroprudential measures initiated by the OeNB have effectively helped strengthen the resilience of Austrian banks. This is most important given the impact resulting for banks from Russia’s invasion of Ukraine, elevated inflation, the cooling of the economy and rising interest rates. Clearly, the manifold challenges and new risks that have emerged in the past three years have underlined the benefit of forward-looking and targeted micro- and macroprudential action.

Banks can meet the challenges with strengthened balance sheets. Having a solid capital and liquidity base is essential, particularly in times of elevated inflation. Vice Governor Gottfried Haber emphasized “the crucial contribution macroprudential measures have made to the improved perception of the Austrian banking sector,” recalling that “S&P (in its Banking Industry Country Risk Assessment – BICRA) has been finding the Austrian banking system to be among the ten most stable banking systems in the world despite the challenging environment. This means that Austrian banks benefit from favorable refinancing costs, which they can pass on to their corporate and retail customers.”

Furthermore, Vice Governor Haber addressed the opportunities and risks arising from the digital transformation. “While going digital enables banks to streamline banking processes and better serve their customers, digitalization also comes with new cybercrime hazards against which protection is needed.”

Supervisory measures adopted in 2022 include enforcing sustainable lending standards for real estate financing and redefining macroprudential buffers. These measures, which international financial institutions such as the International Monetary Fund (IMF) and the European Systemic Risk Board (ESRB) had advised, have helped increase the resilience of the banking sector further. In addition, they have helped the Austrian banking sector catch up with peer systems subject to more stringent macroprudential measures.

In the area of statistics, a new data strategy will help the OeNB to keep meeting its tasks in a dynamic environment to the best of its abilities, and to efficiently handle current challenges, including the exponential growth of data, new statutory tasks and the fast-paced technological change. Moreover, particular efforts were made in 2022 to improve data access and reduce data complexity by using innovative products to substantially improve data visualization. Additional milestones in this business area include the successful completion of a multiyear project to migrate the reporting system to a modern IT infrastructure, progress made with rolling out the Eurosystem Integrated Reporting framework building on OeNB expertise, as well as forward-looking analyses and preparatory work for identifying patterns that point to irregularities at individual banks.

Cash-related initiatives and groundwork for a digital euro
2022 also marked the 20^th anniversary of the changeover to euro banknotes and coins. Together with its money-handling subsidiaries, the OeNB commemorated this event with a broad range of activities. To this day, cash remains highly popular in Austria, with people appreciating above all the anonymity of cash payments and the resilience of cash in times of crisis. “In line with our commitment to safeguarding the supply of physical cash alongside further digital payment innovations, we launched a “euro cash platform” in September 2022, which we use to reach out to stakeholders and money users,” added OeNB Executive Director Eduard Schock. He also recalled the OeNB’s new “cash when you need it” contingency planning initiative, aimed at encouraging people to plan ahead for potential blackouts or large-scale cyberattacks. Having some cash ready in such instances will stand people in good stead. “For this reason, the OeNB advises households to stow away around EUR 100 worth of cash in small denominations for each household member,” explained Executive Director Schock.

To complement cash, the Eurosystem is, furthermore, investigating whether to introduce a digital euro. A digital euro would be issued, protected and regulated by the ECB, just like euro cash, and would thus be equally trustworthy. “From today’s perspective, the investigation phase for the potential rollout of a digital euro is likely to end in October 2023,” explained Governor Holzmann. The digital euro would be central bank money that individuals and companies can use for day-to-day payments and transactions. As an affordable alternative to cash and payment instruments issued by private sector institutions, it offers people in the euro area and beyond an additional choice about how to pay. The digital euro would also strengthen the euro area’s monetary sovereignty. Hence, in times of crisis, Europe would not depend on payment systems provided by non-European institutions.

Policymakers are expected to endorse a digital euro at the EU level until the end of this year. “Starting in the fall of 2023, the ECB will begin pilot testing a digital euro, with a view to addressing the complex issues of detail,” Governor Holzmann added.

Sustainability is part of the OeNB’s corporate strategy
The corporate strategy of the OeNB is increasingly becoming focused on sustainability. Clearly, the only way forward for both the OeNB and its subsidiaries is to ensure sustainable business operations and help protect the environment. The OeNB keeps an eye on how its activities impact on society and the environment – with a view to promoting sustainable development in Austria and beyond. “As pledged in 2021, the OeNB aims to be carbon neutral by 2040,” Governor Holzmann noted. “At present, we cooperate closely with international bodies to develop metrics and instruments to achieve the respective targets.”

“The OeNB has put in place a broad risk management system with a view to identifying, evaluating and addressing any significant risks,” explained Executive Director Thomas Steiner. “In this vein, our risk processes also take into consideration environmental, social and governance (ESG) risks. ESG risks have the potential to impact the OeNB’s risk profile. Therefore, we have been making an effort to integrate ESG risks into our risk processes,” summarized Executive Director Steiner.

New OeNB General Council Members
Two General Council members, Bettina Glatz-Kremsner and Peter Sidlo, completed their terms in office on February 28, 2023. As their replacement, Sigrid Stagl and Christian Helmenstein were nominated by the Austrian government to sit on the General Council of the Oesterreichische Nationalbank for a five-year term starting on March 1, 2023. Their term in office thus runs to February 29, 2028.

Governor Holzmann thanked Ms. Glatz-Kremsner and Mr. Sidlo for their dedicated contributions to the General Council and its subcommittees on accounting and internal control systems, as well as for the OeNB’s subsidiaries, the Anniversary Fund and staff issues.

Further staff changes on the OeNB’s General Council may be ahead between May and September 2023, as President Harald Mahrer and Vice President Barbara Kolm will complete their terms in office in the months ahead, as will three General Council Members, namely Franz Maurer, Christoph Traunig and Stephan Koren. 

At the end of the press conference, Governor Robert Holzmann thanked all members of staff, also on behalf of the OeNB’s General Council and Governing Board, for their ongoing outstanding commitment.