The European Central Bank (ECB) is currently inclined to keep the amount of money that banks are required to hold with it interest-free unchanged, alleviating concerns over an immediate impact on bank profitability.
Ahead of a pivotal meeting scheduled for Wednesday regarding an overhaul of the ECB’s framework for implementing monetary policy, sources familiar with the matter revealed that a push by some more hawkish officials to raise the Minimum Reserve Requirements (MRR) from the existing 1% has faced resistance and lacks significant traction.
While no final decision has been made yet, if the current level is indeed affirmed this week, officials haven’t ruled out the possibility of a future increase, according to the sources who preferred to remain anonymous due to the confidential nature of the discussions.
The news had an impact on banking stocks, with Deutsche Bank AG rising by as much as 1.95% and BNP Paribas SA increasing by up to 0.64%.
President Christine Lagarde disclosed last Thursday that the ECB aims to reach a consensus this week following months of reviewing its framework, highlighting that MRR would be part of the subsequent announcement. Market observers are eagerly awaiting the decision, as it could potentially influence the credit flow within the euro area.
Expectations have been varied, with analysts from Commerzbank predicting a hike to 2% while economists at UniCredit foresee no change. Regardless of the decision made and announced on Wednesday, adjustments to the ratio remain possible at any time.
An ECB spokesperson declined to comment on any potential MRR decision.
Currently, lenders are required to maintain 1% of certain liabilities, primarily customer deposits, at the ECB. Last July, policymakers ceased paying interest on these holdings. Some advocated for increasing the required amount from banks, arguing that 2% had been the standard before 2011.
Certain officials still advocate for compelling banks to hold more cash at the ECB, contending that this would mitigate the excess liquidity in the financial system and reduce losses incurred from the higher interest paid by the ECB and its 20 national central banks on deposits.
Last year, Austria’s Robert Holzmann suggested increasing the ratio to a range of 5-10%, a proposal met with concern from bank lobbyists who argued that a stricter requirement would essentially act as a tax and hinder lending.
Bank of Spain Governor Pablo Hernandez de Cos previously stated that further action “doesn’t seem obvious,” while Belgium’s Pierre Wunsch noted that he sees “no strong arguments” in favor of a higher minimum reserve ratio.
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Author Faith Yakubu 
