The European Central Bank will discuss raising the minimum reserves that banks must hold, President Christine Lagarde said Thursday. Doubling the requirement to 2% would save the ECB and euro zone central banks nearly €4 billion a year and ease politically sensitive losses in Germany and the Netherlands.
The European Central Bank will discuss raising banks' minimum reserve requirements, 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. The idea was not on the table at Thursday's meeting, where policymakers kept interest rates on hold, though Lagarde signalled it would return.
She told her news conference the topic would return to the Governing Council, according to Reuters: "It will, as it has been."
What the ECB is weighing
Sources told Reuters last month that the central bank was considering doubling the share of cash lenders must park in an unremunerated account as a buffer against a liquidity crunch. Such a change would lower the interest those banks earn from their national central banks. A decision was likely to come in the autumn, the sources said.
Commercial banks now keep 1% of their deposits and some short-term liabilities in reserve. Doubling that to 2% would save the ECB and the 21 national central banks nearly €4 billion per year, according to Reuters calculations.
Why the losses matter
This measure would address politically sensitive losses at central banks in some euro zone countries, such as Germany and the Netherlands. Those losses are a side effect of the ECB's liquidity injections of 2015 to 2022, carried out when interest rates were negative and inflation low.
The Eurosystem does not remunerate minimum reserves, yet banks receive the ECB's deposit rate — currently 2.25% — on every additional euro they deposit. That arrangement leaves the Eurosystem paying nearly €50 billion per year on just over €2 trillion worth of liquidity.
Some of the debt bought by national central banks in high-rated countries carried low or negative yields. Those banks were then left with heavy losses when the ECB raised its deposit rate to combat high inflation in 2022-23.
Source: Reuters
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