**Title: ECB Considers Doubling Bank Reserve Requirements to Alleviate Interest Expenses**
The European Central Bank (ECB) is exploring the possibility of increasing the minimum reserve requirement for banks from 1 percent to 2 percent of customer deposits and certain other funding sources. This potential move, which is still in the early stages of discussion among ECB policymakers, aims to reduce the central bank's interest expenses and address the challenges posed by ongoing inflationary pressures.
According to six sources familiar with the matter, the proposed change would require banks to hold a larger proportion of their cash in unremunerated accounts at the ECB. Currently, the ECB and the 21 national central banks within the euro area are facing a significant financial burden, paying an interest rate of 2.25 percent on approximately €2.16 trillion of excess liquidity. This has resulted in an annual cost of around €48.7 billion.
By doubling the mandatory reserves, the ECB could reduce its annual interest bill by nearly €4 billion. This adjustment comes at a time when the central bank has been grappling with rising costs due to increased deposit rates, which were recently raised from 2 percent to 2.25 percent in response to inflationary concerns exacerbated by the ongoing conflict in Iran.
The last time the minimum reserve requirement was altered was during the eurozone debt crisis in 2012, when it was reduced from 2 percent to 1 percent to provide banks with additional liquidity. The ECB's current consideration reflects a shift in strategy as it seeks to manage excess liquidity in the banking system and mitigate the financial strain on its operations.
The discussion surrounding the potential increase in reserve requirements is particularly sensitive given the political implications of central bank losses. While the ECB is not profit-driven, substantial losses can hinder its ability to pay dividends to member states and may necessitate requests for government capital in extreme cases. To manage these losses, institutions like the Bundesbank have opted to stagger their financial setbacks over several years.
In 2023, the ECB faced significant losses, primarily due to the high levels of excess liquidity in the system and elevated deposit rates. Although the Governing Council previously considered raising minimum reserves, the proposal did not gain sufficient support at that time. However, the banking sector has since demonstrated strong profitability, indicating that it can function effectively with lower levels of excess liquidity.
The ECB is expected to make a decision regarding this potential increase in reserve requirements by autumn. As discussions continue, the central bank remains focused on balancing its inflation control efforts with the financial realities of its operational costs. An ECB spokesperson has refrained from commenting on the ongoing deliberations.
As the situation develops, the implications of this potential policy change could be significant for both the banking sector and the broader eurozone economy, particularly in light of the central bank's dual mandate to maintain price stability while ensuring the stability of the financial system.