By Tom Fairless

FRANKFURT--Germany's central bank reported a sharp drop in annual profit on Thursday, as it ramped up its risk buffers to guard against possible losses when interest rates start to rise.

Net profit slumped to 399 million euros in 2016 from EUR3.2 billion in 2015.

In a statement, Bundesbank President Jens Weidmann attributed the drop to setting aside EUR1.8 billion in provisions against interest-rate risks--a first for Germany's central bank. The move bolsters the central bank's total risk buffers to a massive EUR15.4 billion.

It shows how the Bundesbank is preparing for an end to the ECB's easy-money policies, which include long-term loans to banks and a massive bond-purchase program.

-Write to Tom Fairless at tom.fairless@wsj.com

(END) Dow Jones Newswires

February 23, 2017 05:20 ET (10:20 GMT)