The worst performance in history! The European Central Bank recorded losses for the third consecutive year, setting the longest "consecutive loss record" since its establishment

Due to the continued drag of the policy legacy from the crisis period, the European Central Bank (ECB) has reported annual losses for the third consecutive year, setting a record for the longest consecutive losses since the institution's establishment.

According to Bloomberg, the ECB stated on Thursday that the loss for 2025 is €1.3 billion (approximately $1.5 billion). This result represents a significant narrowing compared to the record high loss of €7.9 billion from the previous year.

The ECB reiterated that it can continue to operate effectively regardless of whether it incurs losses. As in previous years, the funding gap for 2025 will be retained on the ECB's balance sheet to offset future profits. As a result, the ECB will not distribute profits to the central banks of member states this year.

Regarding future financial conditions, the ECB expects to return to profitability either this year or in 2027. The specific timing of profitability will depend on the levels of the ECB's future key interest rates and exchange rates, as well as the size and composition of its balance sheet.

The "Aftermath" of Crisis Policies and the Outlook for Quantitative Easing

Like other major central banks, the ECB is currently paying interest that exceeds the returns generated from bonds purchased at low borrowing costs during previous emergencies. Although this asset-liability mismatch is expected to persist, as inflation stabilizes near target levels, policymakers have lowered the benchmark borrowing cost from 4% to 2%, and with the continued contraction of the balance sheet, this financial pressure has become less acute.

The consecutive losses have also sparked discussions about central bank independence and policy tools. Some policymakers have urged greater caution regarding future asset purchases, and the market even speculates that the central bank may ultimately need government capital injections, which would jeopardize its independence.

In last year's strategic review, the ECB retained all policy tools, including quantitative easing (QE), but did not specify the conditions under which they should be used. However, comments in the review report and statements from some officials suggest that, considering the chain reactions of losses and asset bubbles, the use of quantitative easing policies may be more restrained in the future.

Impact of Volatility in Gold and Foreign Exchange Markets on the Bottom Line

The sharp fluctuations in gold and foreign exchange rates significantly affected the ECB's profitability last year. Driven by rising prices, the euro-denominated value of the ECB's gold reserves increased by 46%, totaling just under €60 billion.

At the same time, the ECB's holdings of US dollars and Japanese yen have decreased, primarily due to the depreciation of these currencies. As part of the routine rebalancing of foreign exchange reserves, the ECB sold US dollars in the first quarter of 2025, realizing a gain of €909 million, and reinvested all of these funds into Japanese yen.

Investors should note that, although the ECB currently has some provisions to guard against the risk of a future decline in the US dollar, its buffer funds to respond to further declines in the Japanese yen have been completely exhausted. This means that if the yen continues to depreciate in the future, the ECB will be directly exposed to new loss risks.