Bank of Estonia rerouted lion's share of 2023 revenues to replenishing reserves

The Bank of Estonia (Eesti Pank) has reported 2023 revenues of nearly €113 million, while expenses came to €25.6 million in the same year.
Nonetheless, the fiscal year in fact ended up breaking even for the central bank, since 2023 revenues were also partly allocated to replenish financial buffers used in 2022.
The Bank of Estonia issued its 2023 annual report today, Monday.
The bank reported it: "Also broke even in the fiscal year 2022, but due to a sharp increase in interest rates, the bank incurred a loss of over €150 million on its securities portfolio."
"To cover this loss, the central bank utilized buffers created from the profits of previous years to cover financial risks."
The Bank of Estonia reported €98 million in investment earnings at market prices in 2023, while accounting profit from these investments came to €39 million.
The difference here is the result of accounting rules not recognizing unrealized gains on securities as earned income.
Furthermore, the Bank of Estonia generated €52.5 million in 2023 from the joint monetary policy transactions of eurozone central banks.
The central bank also recorded nearly €25 million in accounting income from a significant reduction to its Kroon reserve fund, which is intended to cover obligations for exchanging Estonian kroons.
The kroon was the Estonian currency from 1992 to the end of 2010. It was pegged to the euro at a rate of 15.65 kroons to €1.
The central bank stated: "The volumes of Estonian kroons to be exchanged have been small in recent years and are diminishing annually, since some people keep kroons as mementos, plus some have been destroyed."
At the same time, the service will remain for the foreseeable future, the bank said.
"According to accounting rules, the reserve for the obligation to exchange kroons must consequently be reduced. The Bank of Estonia will continue to exchange kroons for euros indefinitely," the central bank went on in its statement.
The central bank said it substantially replenished the risk allocation buffer utilized last year, directing €87.2 million towards that. The total equity capital held by the Bank of Estonia as of the end of 2023 stood at over €660 million.
Bank of Estonia President Madis Müller said the bank: "Operates on a financially sound foundation. While the central bank's financial results may vary down the years, we have managed to maintain the capital level necessary to cover the financial risks arising from the Bank of Estonia's balance sheet, which amounts to more than €14 billion."
"Market sentiment, that base interest rates would no longer rise, led to an increase in both stock and bond prices at the end of 2023, and thanks to this the Bank of Estonia made profits from its asset investments. The income earned from the investment portfolio as at the end of last year was €98 million, which is a recent high," Müller continued in the report.
"Our financial assets are still invested in high-quality securities. As of the end of the year, Eesti Pank had investment assets worth around two billion euros, about five percent of Estonia's gross domestic product," Müller added.
As a member of the eurozone, Eesti Pank's primary task is to curb inflation. The European Central Bank makes its monetary policy decisions to ensure stable and moderate price increases across the eurozone.
To curb the recent rapid inflation seen in the eurozone, the European Central Bank's (ECB) supervisory board hiked interest rates steeply (4.5 percentage points from July 2022 to September 2023 - ed.). As a side effect to this, many eurozone central banks incurred losses in 2022.
The Bank of Estonia wrote: "Since the primary task of the eurozone central banks is to control inflation, earning profits, be they from investments or other activities, is secondary to them. Generally, central banks try to create large enough financial buffers to cover potential losses."
The Bank of Estonia's investment assets were primarily placed into bonds as of the end of 2023; some were also invested in the stock markets of some developed countries.
The bond portfolio volume at the end of 2023 came to €1.794 billion, while the stock portfolio volume was reported at €237 million. The bond portfolio consisted of government bonds from the U.S., Australia, Canada, and the U.K. "Stock investments are made primarily for diversifying risks but also for earning additional income," the report stated.
Additionally, the Bank of Estonia held gold in its vaults to a value of €15.4 million.
On this, the report stated: "The Bank of Estonia holds a total of 256.6 kilograms, or 8,250 ounces, of gold, which has been retained primarily for historical rather than financial reasons.
At the start of the restored independence era, most of the Bank of Estonia's gold reserves were sold to instead buy bonds, which allowed for better achievement of the goals set for these reserves," the report added.
The average number of Bank of Estonia employees, calculated as full-time equivalents, came to 229.5 in 2023 (unchanged from 2022).
Personnel costs grew from €12.35 million to €14 million last year.
Administrative expenses rose from €7.3 million to €7.8 million over the same period, the central bank reported.
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Editor: Andrew Whyte
Source: Bank of Estonia