The European Central Bank is weighing a significant change to the way it manages liquidity across the euro area, with policymakers discussing a proposal to double the minimum reserves banks must hold from 1% to 2%, according to six sources cited by Reuters. If adopted, the move would reduce the ECB’s interest costs, absorb excess liquidity from the financial system and mark another step in the gradual unwinding of the extraordinary stimulus introduced over the past decade.
A Shift In The ECB’s Liquidity Strategy
Discussions are taking place as part of a broader review of the ECB’s operating framework, although the proposal has not yet been formally presented to the Governing Council. According to Reuters’ sources, deliberations remain at an early stage and a decision is unlikely before the autumn.
Follow THE FUTURE on LinkedIn, Facebook, Instagram, X and Telegram
For the ECB and the euro area’s national central banks, raising the reserve requirement would serve two objectives. Increasing the amount of deposits banks must hold without earning interest would reduce the Eurosystem’s interest expenses while absorbing part of the excess liquidity created through years of large-scale bond purchases. Much of that surplus liquidity remains concentrated in countries such as Germany, where central banks have incurred sizeable losses from paying interest on deposits held above the required reserve level.
Billions In Potential Savings
At the current deposit rate of 2.25%, the ECB and the euro area’s 21 national central banks are paying interest on roughly €2.16 trillion of excess liquidity, equivalent to around €48.7 billion a year, according to Reuters calculations.
Doubling mandatory reserves from their current level of €173.56 billion would reduce that annual interest bill by almost €4 billion. Pressure on central bank finances has intensified since this month’s increase in the ECB’s deposit rate from 2% to 2.25%, a move intended to contain inflationary pressures linked to the war in the Middle East that also lifted the annual cost of excess liquidity by an estimated €5.4 billion.
Why Reserve Requirements Matter Again
Minimum reserve requirements were last reduced in 2012, when the ECB cut them from 2% to 1% at the height of the eurozone sovereign debt crisis to support lending and stabilise the banking system.
More than a decade later, policymakers face a very different environment. Banks have reported record profits, liquidity remains abundant, and the financial system no longer depends on the same level of extraordinary central bank support. Against that backdrop, increasing reserve requirements has become part of a broader discussion about how quickly the ECB should normalise its balance sheet.
Implications extend well beyond the central bank itself. Persistent losses reduce the profits national central banks can distribute to governments and, in more extreme cases, may require additional public capital. Institutions such as Germany’s Bundesbank have already spread those losses over several years after the ECB’s deposit rate reached as high as 4% in 2023 while excess liquidity remained at historically elevated levels.
Part Of A Broader Normalisation Process
Beyond the immediate savings, the discussion reflects a wider reassessment of the ECB’s monetary policy framework as crisis-era support measures continue to be unwound.
An increase in reserve requirements would signal that policymakers are looking beyond inflation alone and placing greater emphasis on the long-term costs of maintaining large volumes of idle liquidity in the financial system. It would also shift a greater share of that burden back to commercial banks while giving the ECB more control over the size and cost of its balance sheet.
