European Central Bank officials are considering an increase in the mandatory minimum reserve rate that banks must hold in unremunerated accounts, according to six sources briefed on the discussions. The contemplated change would raise the minimum from 1% to 2% of banks' customer deposits and certain other funding items.
Proponents argue the adjustment would reduce the interest the Eurosystem pays on the large pool of excess liquidity that accumulated during the bond-buying stimulus of the past decade. That pool remains sizeable in cash-rich member states such as Germany, where central banks face particularly large interest outlays on deposits held by commercial banks above required reserves.
At present, the ECB and the 21 national central banks in the euro area are paying 2.25% on roughly 2.16 trillion of excess liquidity, producing annual interest outlays of about 48.7 billion, calculations show. Raising the unremunerated minimum reserve rate to 2% would reduce that combined annual interest bill by nearly 4 billion, based on the current stock of mandatory reserves of 173.56 billion.
Officials note the central bank's interest expense has climbed after a recent hike in the deposit rate from 2% to 2.25% this month. That increase added around 5.4 billion to the Eurosystem's annualised interest cost.
The idea to lift minimum reserves has been discussed internally but has not reached the stage of a formal Governing Council debate. Sources said the talks remain at an early stage and that a final decision could come by the autumn. An ECB spokesperson declined to comment on the deliberations.
Raising the required, non-remunerated reserve level would have two principal effects: first, it would trim the interest bill central banks are absorbing on funds parked with them in excess of mandatory reserves; second, it would withdraw some of the surplus liquidity from the banking system, supporting ongoing efforts to wean banks off free cash.
The stock of excess liquidity itself ballooned through the stock of assets acquired under prolonged bond purchases over the prior decade. That accumulation left central banks paying interest on deposits that far exceeded the mandatory reserve base at the time.
There are political considerations underlying the discussion. Although the ECB and national central banks are not profit-driven institutions and are focused on price stability, substantial losses among the national central banks have become sensitive. When central banks report big losses, their ability to channel dividends to state treasuries is constrained and, in extreme scenarios, they could require capital injections from their governments. To manage this, institutions such as the Bundesbank and others have spread losses across multiple years.
Losses were at their peak in 2023, when excess liquidity remained in the trillions and the deposit rate reached 4%. At that time the ECB's Governing Council considered raising minimum reserves, though that specific proposal did not gain enough backing.
Since then, the banking sector has produced record profits while operating with lower levels of excess liquidity, observers say. That track record has helped renew interest in tools that would reduce the Eurosystem's interest expenses and drain surplus cash from banks' balance sheets.
Any change to the minimum reserve framework will be reviewed as part of a broader reassessment of the ECB's operational framework scheduled for this year. Policymakers are weighing how to adjust technical settings to align with monetary policy objectives and to limit unintended consequences from prolonged large-scale liquidity provision.
Key takeaways
- ECB policymakers are considering doubling the minimum reserve requirement from 1% to 2% of customer deposits and certain funding items.
- The move would reduce the combined annual interest bill of the Eurosystem by about 4 billion and would withdraw some excess liquidity from the banking system.
- A formal decision has not been taken; discussions are at an early stage and any vote could occur by the autumn.
Impacted sectors
- Banking sector - changes to reserve rules affect liquidity positions and interest income dynamics.
- Public finances/national central banks - reduced central bank losses could affect dividend flows to state treasuries and capital positions.
- Money markets - shrinking excess liquidity would alter short-term funding conditions.
Risks and uncertainties
- The proposal remains at an early stage and has not been formally discussed by the Governing Council, so the final policy choice and timing are uncertain.
- Any change in minimum reserves would shift liquidity within the banking system, with unclear near-term impacts on interbank funding and short-term rates.
- Political sensitivity around central bank losses means national authorities may react differently to adjustments that affect reported losses and dividend capacity.