FRANKFURT - The European Central Bank intends to discuss raising the minimum reserve requirement for banks, ECB President Christine Lagarde said on Thursday, leaving open the prospect of a policy change designed to cut interest costs the Eurosystem pays on the large pool of liquidity it has injected into the banking system.
Lagarde told her regular news conference that the topic was not on the agenda at the current Governing Council meeting, where policymakers left interest rates unchanged, but that it would be considered at a future meeting. "On the minimum reserve requirement, it was not discussed on the occasion of this Governing Council, which doesn t mean to say that it will not be discussed," she said. "It will, as it has been."
Officials have been examining the idea of increasing the share of certain short-term bank liabilities that must be held in reserve at national central banks without remuneration. Sources said last month that ECB staff and some officials had been weighing a potential doubling of the applicable reserve ratio - from the current 1% to 2% - so that a larger portion of deposits and other short-term liabilities would be parked in non-remunerated reserve accounts.
Under the current framework, commercial banks are required to keep 1% of deposits and some other types of short-term liabilities on reserve at their national central banks. The Eurosystem does not pay interest on these minimum reserves at present. Banks, by contrast, receive the ECB s deposit rate on balances they place above those minimum reserves. That deposit rate is currently 2.25%.
Doubling the minimum reserve ratio to 2% would reduce the amount of extra balances that earn the deposit rate, and by doing so would lower the interest the Eurosystem pays on excess liquidity. Calculations cited last month showed such a change could save the ECB and the 21 national central banks in the Eurosystem nearly c4 billion a year.
Large interest payouts on excess liquidity have contributed to politically sensitive reporting of losses at some national central banks, notably in high-rated countries. Those losses stem in part from the interaction between the Eurosystem's crisis-era asset purchases and the subsequent rise in policy rates. Between 2015 and 2022 the ECB injected substantial liquidity into the banking system as part of its bond-buying programmes aimed at stimulating activity and guarding against deflation. When the ECB later raised rates to fight high inflation in 2022 and 2023, some national central banks found themselves holding portfolios of securities purchased at low or negative yields, producing significant valuation gaps.
The scale of excess liquidity is substantial. The Eurosystem pays nearly c50 billion a year in interest on just over c2 trillion of liquidity parked with central banks, reflecting the combination of large liquidity stocks and the current deposit rate applied to balances above minimum reserves.
Sources said a decision on any adjustment to minimum reserves had been likely to come in the autumn, though Lagarde s comments made clear that, while the measure remains under consideration, it was not adopted at the July meeting.
Implications and context
Raising the minimum reserve ratio would be a technical policy lever with direct consequences for the Eurosystem s interest bill and for the reported profitability of some national central banks. It would alter how much of the banking system s deposits receive the deposit rate, thereby lowering the Eurosystem s net interest outflow without changing the headline policy rates set by the Governing Council.
The measure addresses a narrow but politically charged balance-sheet issue for central banks, rather than acting as a conventional tool for managing inflation or growth. Lagarde s confirmation that the topic will be discussed means markets, national central bank accountants and bank treasury operations teams may start to factor the possibility of a change into planning, even though no decision has yet been taken.
Quotes
"On the minimum reserve requirement, it was not discussed on the occasion of this Governing Council, which doesn t mean to say that it will not be discussed. It will, as it has been." - Christine Lagarde
Where matters stand
- Minimum reserve requirement today: 1% of deposits and certain short-term liabilities.
- Possible change being considered: increase to 2%, effectively doubling the current requirement.
- Potential annual savings for the Eurosystem from such a change: nearly c4 billion, based on calculations cited last month.
- Current deposit rate applied to excess balances: 2.25%.
- Estimated interest paid by the Eurosystem on excess liquidity: nearly c50 billion per year on just over c2 trillion of liquidity.
Lagarde s remarks signal that the technical policy option remains live and that further discussion is expected at upcoming Governing Council meetings. Any formal decision would likely follow additional analysis and internal deliberations, with sources indicating a possible timetable for action in the autumn.