ECB's Wunsch pushes back on proposal to increase bank charges

ECB's Wunsch Warns Against Higher Bank Charges, Citing Policy Risks

Debate Over Increasing Bank Charges and Policy Implications

FRANKFURT, Oct 8 (Reuters) - European Central Bank policymaker Pierre Wunsch pushed back on a proposal to increase charges on commercial banks, warning that it could hurt the credibility of future central bank operations and might even cross into the realm of fiscal policy.

Current ECB Policy Discussions

ECB policymakers are now debating whether to require banks to hold more of their excess liquidity in an unremunerated account, partly to reduce the ECB's own financial losses and partly to tighten financing conditions at a time of high inflation.

Minimum Required Reserve Ratio Proposal

"There are now 'ongoing discussions' about applying a higher minimum required reserve ratio – the MRR ratio – while of course keeping required reserves unremunerated," Wunsch, Belgium's central bank chief, told a conference in Brussels. "Honestly, the reasoning here is not very clear, or convincing, to me."

Background: ECB's Excess Liquidity and Financial Losses

The ECB created trillions of euros of excess liquidity via bond buys in the pre-pandemic decade when rates were at or below zero, and it must now pay a hefty interest charge to commercial banks when they deposit this cash back at the bank.

Impact on National Central Banks

This has pushed up financial losses, especially at Germany's Bundesbank, which has stopped paying a dividend into the government budget and may not have cash for such dividends until the next decade.

Quasi-Fiscal Instrument Concerns

"If the goal is to limit our losses, the MRR ratio would become a quasi-fiscal instrument," Wunsch said. "And fiscal policy is typically not a role allocated to the central bank."

Potential Risks to Future Central Bank Operations

Wunsch said that if banks are now taxed more heavily on this income, they may not be keen to take part in a future bond purchase scheme and this could then hurt the credibility of a central bank operation.

Focus on Minimum Reserve Charges Amid High Inflation

Minimum reserve charges have come into focus this year as the ECB is raising interest rates to combat high inflation. This is also raising national central banks' interest expense, as there are still over €2.1 trillion of excess liquidity in the financial system.

(Reporting by Balazs KoranyiEditing by Gareth Jones and Louise Heavens)