The European Central Bank (ECB) is considering a plan to increase the minimum reserve requirements for banks, which could help reduce the central bank’s own losses. According to sources, the ECB may raise the minimum reserve requirements from 1% to 2% of banks’ customer deposits and other forms of funding.
Background
The potential increase is being debated by ECB policymakers as a way to mitigate the side effects of its inflation fight. The ECB and national central banks in the euro area are currently paying a 2.25% interest rate on excess liquidity, resulting in annual outlays of around €48.7 billion.
Doubling the minimum reserve requirements would reduce the central banks’ combined annual interest bill by nearly €4 billion. The minimum reserve requirement rate was cut to 1% from 2% in 2012, at the height of the euro zone’s debt crisis.
Implications
The move could also help to mop up some of the excess liquidity in the system, which has grown significantly over the past decade due to the ECB’s bond-buying stimulus programs. The ECB’s efforts to wean banks off free cash are part of a broader framework review this year.
A decision on the potential move is expected by the autumn, although the discussion within the ECB is still at an early stage. An ECB spokesperson declined to comment on the matter.
Original reporting: Appleton, WI News Feed (HLL/CB) — read the source article.
