ECB Considers Reserve Rate Hikes to Offset Stimulus Policy Losses

The European Central Bank (ECB) is exploring various options to mitigate its financial losses, according to four sources. One possibility being considered is raising minimum reserve requirements, which would increase the amount of cash banks must keep in an unremunerated account as a buffer against liquidity crunches.

Currently, commercial banks must hold 1% of their deposits and other short-term liabilities in reserve at their respective central banks. Doubling this to 2% could save the ECB and national central banks nearly €4 billion per year, according to Reuters calculations.

The ECB is also considering stopping remunerating some excess reserves held by banks above the required minimum, known as a tiered rate. This would result in fewer interest payments for the Eurosystem, but potentially create an incentive for smaller banks with liquidity below 2% to transfer their reserves to larger banks that already clear this threshold.

The ECB has also floated the idea of scrapping minimum reserve requirements altogether and charging banks fees instead. However, some governors argue that tinkering with reserve remunerations is a central bank tool being used for fiscal rather than monetary policy goals.