Global Market: ECB signals future debate on raising bank reserve requirements to reduce central bank losses

The European Central Bank (ECB) is set to discuss raising the minimum reserve requirements for commercial banks, a move that could lower interest payments to lenders while easing financial pressures on the Eurosystem, according to ECB President Christine Lagarde, as per a Reuters report.

Speaking after the ECB's policy meeting on Thursday, Lagarde said the issue was not discussed during the latest Governing Council meeting, where policymakers left interest rates unchanged, but confirmed that it remains on the agenda for future discussions. The matter is expected to be considered in the coming months.

According to Reuters, sources familiar with the matter said last month that the ECB was considering doubling the minimum reserve requirement for banks from 1% to 2%. Such a move would require lenders to hold a larger share of deposits in non-interest-bearing reserve accounts at their national central banks, reducing the amount of liquidity that earns interest.


Potential savings for the Eurosystem
Reuters calculations show that increasing the reserve requirement to 2% could save the ECB and the 21 national central banks that make up the Eurosystem nearly €4 billion annually.

Currently, commercial banks are required to hold reserves equal to 1% of eligible deposits and certain short-term liabilities. While these mandatory reserves do not earn interest, any additional funds parked with central banks receive the ECB's deposit facility rate, which currently stands at 2.25%.

The Eurosystem is estimated to be paying close to €50 billion a year in interest on more than €2 trillion of excess liquidity held by banks.

Addressing central bank losses
The proposal is also aimed at addressing mounting losses at several euro zone national central banks, particularly in countries such as Germany and the Netherlands.

These losses stem from the ECB's large-scale monetary stimulus programmes conducted between 2015 and 2022, when interest rates were negative and the central bank purchased vast quantities of government and corporate bonds to support economic growth and ward off deflation.

As inflation surged in 2022 and 2023, the ECB sharply increased interest rates, forcing central banks to pay higher interest on commercial bank deposits while many of the bonds acquired during the asset purchase programmes continued to generate very low or even negative returns.

The mismatch between higher funding costs and low-yielding assets has weighed heavily on the finances of several national central banks, making reserve requirement changes an increasingly important policy option.

Decision expected later this year
According to Reuters, sources expect the ECB to take a decision on the reserve requirement proposal in the autumn.

While no formal decision has yet been made, Lagarde's comments indicate that policymakers are preparing to revisit the issue as they assess ways to reduce the financial burden created by the euro zone's large stock of excess liquidity without altering the broader monetary policy stance.