FRANKFURT, July 23 - The European Central Bank is exploring a set of possible actions to reduce the losses now being carried by the Eurosystem, with the discussion intensifying ahead of a likely decision in the autumn, four sources said.
ECB President Christine Lagarde confirmed that governors will deliberate on raising minimum reserve requirements, a move that would require commercial banks to hold a larger share of deposits and certain short-term liabilities in unremunerated accounts with their national central banks as a buffer for potential liquidity stress.
Other options being considered include applying a tiered remuneration system in which interest would not be paid on certain tranches of banks' excess reserves, or in some proposals even charging fees on reserves, the sources added. Those alternatives aim to reduce the pay-out burden on the Eurosystem that has built up following years of stimulus.
A spokesperson for the ECB declined to comment on the discussions.
Minimum reserves under review
Commercial banks currently must keep 1% of their deposits and a portion of short-term liabilities as reserves at their central banks; those reserves are not remunerated. One option on the table is to double that requirement to 2%. Reuters calculations show that raising the minimum to 2% would save the ECB and the 21 national central banks of the Eurosystem nearly c4 billion per year.
Such a change would compel a subset of banks to obtain additional cash to meet the higher threshold, although most banks already hold reserves above 1% and therefore would be less affected.
Reintroducing tiered rates
Another preference among some policymakers is to stop remunerating parts of banks' excess reserves above the minimum. At present, banks receive a 2.25% interest rate on euros deposited above required reserves. That arrangement leaves the Eurosystem paying almost c50 billion annually on a little over c2 trillion of liquidity parked with central banks.
Reinstating a tiered rate structure would be a less disruptive option for many banks, the sources said. But it could also disadvantage the minority of institutions whose liquidity sits below the proposed 2% threshold. Those banks would receive no interest from the Eurosystem and might be incentivized to move reserves to banks already meeting or exceeding that threshold, enabling both counterparties to receive some payout while leaving the Eurosystem's interest bill unchanged, the sources cautioned.
Fees and structural alternatives
A more unconventional proposal discussed by some within the ECB would see the abolition of minimum reserve requirements altogether and the introduction of fees instead. Views differ among governors about whether adjusting remuneration or reserve rules to limit losses is appropriate, with critics arguing such moves repurpose a monetary policy tool to address an issue that has fiscal implications.
When a central bank runs losses, its capacity to distribute dividends to national governments diminishes, and in extreme cases it may need to request a capital injection from those governments. Some national central banks, such as the Bundesbank, have sought to manage these dynamics by staggering losses.
Origins of the losses
The losses stem in large part from the accumulation of central bank securities purchases conducted from 2015 to 2022, a period when the ECB purchased substantial amounts of debt to stimulate the economy and ward off deflationary pressures. Some debt bought by national central banks in highly rated jurisdictions carried low or negative yields. When the ECB raised its deposit rate to counter high inflation in 2022 and 2023, those dynamics left several national central banks sitting on sizeable losses.
Some of the securities purchased have since matured, which reduced the volume of reserves in the system and has made the question of remuneration less urgent for some governors.
Context and next steps
The debate among ECB policymakers on this sensitive topic remains open and additional proposals could emerge before a policy decision is reached in the autumn, the sources said. The discussions will weigh the distributional effects on commercial banks, the balance-sheet pressures on national central banks, and the broader question of whether reserve rules should be used to address what some participants view as a fiscal problem.
For reference, the exchange rate at the time of the reporting was $1 = 0.8792 euros.