By Balazs Koranyi and Francesco Canepa
SINTRA, Portugal, June 30 (Reuters) – The ECB is considering doubling the proportion of cash lenders must keep as reserve in an unremunerated account, six sources told Reuters, which would cut the central bank’s own interest bill and mitigate the side effects of its inflation fight.
The potential increase, which is being debated by European Central Bank policymakers, would raise minimum reserve requirements to 2% from 1% of banks’ customer deposits and some other forms of funding, the sources said.
It would help central banks in cash-rich countries such as Germany cut losses stemming from the interest they pay on banks’ deposits that exceed mandatory reserves, which grew into the trillions of euros through the bond-buying stimulus programmes of the last decade.
It would also mop up some of that excess liquidity, advancing ECB efforts to wean banks off free cash that is set to be reassessed as part of a so-called framework review this year.
A decision over the potential move, which has not been formally discussed by the ECB’s Governing Council, is expected by the autumn. The sources said that the discussion within the ECB was at an early stage.
An ECB spokesperson declined to comment.
INTEREST BILL HAS RISEN TO NEARLY €50 BILLION
The ECB and the 21 national central banks of the euro area are paying a 2.25% interest rate on some €2.16 trillion worth of excess liquidity, resulting in outlays of around €48.7 billion per year, Reuters calculations show.
Doubling mandatory reserves, which are not remunerated, from €173.56 billion would reduce the central banks’ combined annual interest bill by nearly €4 billion.
That cost has risen by an annualised €5.4 billion after the ECB increased the deposit rate from 2% to 2.25% this month in a bid to contain the inflation fallout from the Iran war.
The minimum reserve requirement rate was cut to 1% from 2% at the height of the euro zone’s debt crisis in 2012.
CENTRAL BANK LOSSES POLITICALLY SENSITIVE
While the ECB and the rest of the Eurosystem are not run for profit but to control inflation, the huge losses some have suffered in recent years have become sensitive politically.
Loss-making central banks are constrained in their ability to pay dividends into state coffers and might, in extreme cases, be forced to ask their government for capital.
To avoid this, the Bundesbank and others have staggered losses over several years. The biggest were in 2023, when there were still several trillion euros worth of excess liquidity in the system and the ECB’s deposit rate was as high as 4%.
The ECB’s Governing Council discussed increasing minimum reserves then, but the proposal did not gain traction.
The banking sector has since made record profits and shown it can operate well at lower levels of excess liquidity.
(Editing by Alexander Smith)
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