ECB leaning towards keeping banks’ minimum reserve level at 1%

THE European Central Bank (ECB) is leaning against any immediate change in the amount of money lenders need to park with it interest-free, removing for now the threat of a hit to bank profitability.

Ahead of a crucial meeting on Wednesday (Mar 13) on a revamp of the ECB’s framework for implementing monetary policy, a push by some hawkish officials to increase the so-called minimum reserve requirements, or MRR, from the current 1 per cent has struggled to gain momentum, according to sources with knowledge of the matter.

No decision has yet been taken, and even if that level is confirmed this week, officials have not excluded the prospect that it could be raised in the future, the sources said, who asked not to be identified because discussions are confidential.

Banking stocks moved on the news, with Deutsche Bank rising as much as 2 per cent and BNP Paribas up as much as 0.6 per cent.

President Christine Lagarde revealed last Thursday that the ECB is looking to reach consensus this week after months of reviewing its framework, adding that MRR will form part of the subsequent announcement. Observers are eagerly awaiting the decision, as some reckon the outcome could influence the flow of credit to the euro area.

Expectations have varied until now, with Commerzbank analysts predicting an increase to 2 per cent and UniCredit’s economists foreseeing no change. Whatever is decided and announced on Wednesday, adjustments to the ratio are theoretically possible at any time.

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An ECB spokesperson declined to comment on any prospective MRR decision.

Lenders currently need to hold 1 per cent of certain liabilities – mostly customer deposits – at the ECB.

In July last year, policymakers decided to stop paying interest on those holdings. At the time, some wanted the central bank to also raise the amount required from banks, arguing that 2 per cent had been the rule before 2011.

Some officials still want to force banks to hold more cash at the ECB, arguing that this would reduce still-abundant liquidity in the financial system, and also reduce losses incurred from the higher interest that the ECB and its 20 national central banks now pay on deposits.

Austria’s Robert Holzmann last year floated the idea of increasing the ratio to something in the range of five to 10 per cent. Bundesbank’s Joachim Nagel has also indicated he would support a move higher.

Holzmann’s proposal met with alarm from bank lobbyists, who argued that a tougher requirement would be equivalent to a tax and impair lending.

Bank of Spain governor Pablo Hernandez de Cos has said in the past that further action “does not seem obvious to me”. Belgian’s Pierre Wunsch has also observed that he does not see “any strong arguments” in favour of a higher minimum reserve ratio. BLOOMBERG