ECB to Consider Raising Minimum Reserve Requirements for Banks
ECB's Potential Policy Shift and Its Implications
Background and Current Discussions
FRANKFURT, July 23 (Reuters) - The European Central Bank will discuss raising banks' minimum reserve requirements, ECB President Christine Lagarde said on Thursday, opening the door to a move that would cut the ECB's own tax bill and mitigate losses at some national central banks.
Sources told Reuters last month that the ECB was considering doubling the proportion of cash that lenders must keep in an unremunerated account as a buffer in case of a liquidity crunch. Such a change would lower the amount of interest they receive from their national central banks.
Lagarde said the topic was not discussed at Thursday's ECB meeting, at which policymakers kept interest rates on hold, but would be in the future.
"On the minimum reserve requirement, it was not discussed on the occasion of this Governing Council, which doesn't mean to say that it will not be discussed," Lagarde told her regular news conference. "It will, as it has been."
The sources said last month that a decision was likely to come in the autumn.
Impact on Commercial Banks and the Eurosystem
Current Reserve Requirements
Commercial banks must currently keep 1% of their deposits and some other forms of short-term liabilities in reserve at their respective central banks. Doubling that to 2% would save the ECB and the 21 national central banks of the Eurosystem nearly €4 billion per year, according to calculations by Reuters.
Central Bank Losses
CENTRAL BANK LOSSES
Political Sensitivities and National Impacts
The measure would address the politically sensitive topic of losses at central banks in some euro zone countries, such as Germany and the Netherlands.
These are a side effect of the ECB's massive crisis-fighting liquidity injections of 2015 to 2022, undertaken when interest rates were negative and inflation low.
Interest Payments and Liquidity Effects
The Eurosystem does not remunerate minimum reserves at present while banks receive the ECB's deposit rate — currently 2.25% — on every additional euro they deposit.
That leaves the Eurosystem paying interest of nearly €50 billion per year on just over €2 trillion worth of liquidity.
The large pile of cash was injected into the banking system by the ECB itself, when the euro zone central bank was trying to stimulate economic activity and avert the threat of deflation via massive bond purchases.
Consequences of Previous Policy Actions
Some of the debt bought by national central banks in high-rated countries had low or negative yields. These central banks were then left nursing heavy losses when the ECB raised its deposit rate to combat high inflation in 2022-23.
(Reporting by Francesco Canepa; Editing by Catherine Evans)
