The European Central Bank (ECB) is considering a range of measures to reduce mounting financial losses, with policymakers expected to intensify discussions ahead of a decision later this autumn, according to four sources familiar with the matter.
ECB President Christine Lagarde confirmed on Thursday that policymakers would discuss raising minimum reserve requirements for commercial banks, a move that would require lenders to hold more cash in non-interest-bearing accounts as a safeguard against liquidity shortages.
Other options under consideration include reducing or eliminating interest payments on part of banks’ excess reserves through a tiered remuneration system, or even charging banks fees on those reserves, the sources said.
The measures are aimed at easing the financial strain on the ECB and the 21 national central banks that make up the Eurosystem, which have recorded significant losses following years of ultra-loose monetary policy and large-scale bond purchases.
According to the sources, discussions remain wide open, with policymakers divided over the politically sensitive issue and additional proposals likely to emerge before any final decision is reached.
Commercial banks are currently required to hold reserves equivalent to 1% of their deposits and certain short-term liabilities with their national central banks, with those mandatory reserves earning no interest.
Reuters calculations show that increasing the minimum reserve requirement from 1% to 2% could save the ECB and the Eurosystem’s national central banks nearly €4 billion ($4.55 billion) annually.
While most eurozone banks already hold reserves above that threshold, a small number would need to raise additional cash to comply with the higher requirement.
The ECB is also considering ending interest payments on part of the reserves banks hold above the required minimum, the sources said.
Banks currently receive the ECB’s 2.25% deposit rate on every euro held in excess reserves, resulting in the Eurosystem paying almost €50 billion annually on more than €2 trillion in excess liquidity.
The sources said a tiered remuneration system would be less burdensome for most eurozone banks than increasing reserve requirements.
However, banks holding liquidity below 2% would receive no interest on part of their reserves, creating an incentive to transfer funds to banks already above the threshold.
Such transfers could allow both institutions to continue earning interest while doing little to reduce the Eurosystem’s overall interest expenses, the sources added.
Among the more unconventional proposals, some ECB officials have suggested eliminating minimum reserve requirements altogether and instead charging banks fees, according to the sources.
Some policymakers have raised concerns that changing reserve remuneration to reduce financial losses risks using a monetary policy instrument to pursue what is effectively a fiscal objective.
Loss-making central banks have less capacity to pay dividends to their national governments and, in severe cases, may require governments to inject additional capital.
Institutions such as Germany’s Bundesbank have avoided that outcome by spreading losses over a longer period.
The current losses stem largely from the ECB’s extensive bond-buying programme between 2015 and 2022, when it injected vast amounts of liquidity into the banking system to stimulate economic growth and ward off deflation.
Many of the bonds purchased by national central banks carried very low or even negative yields, leaving them exposed to losses after the ECB rapidly increased interest rates between 2022 and 2023 to combat soaring inflation.
As some of those bonds have matured, the volume of excess reserves in the banking system has declined, reducing the urgency of changes to reserve remuneration for some members of the Governing Council.
Speaking after Thursday’s policy meeting, Lagarde confirmed that the issue would be discussed by policymakers, signalling that the debate over the ECB’s balance sheet and financial sustainability is likely to become a key focus in the months ahead.
Boluwatife Enome
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