Euro area banks are required to hold a certain amount of funds as reserves in their current accounts at their national central bank. These are called minimum reserves. A bank’s minimum reserve requirement is set for six-week periods called maintenance periods. The level is calculated on the basis of the bank’s balance sheet prior to the start of the maintenance period.
Banks have to make sure that they meet the minimum reserve requirement on average over the maintenance period. So they do not have to hold the total sum in their current accounts at the central bank on a daily basis. This functions like a valve, allowing banks to react to short-term changes in the money markets, where banks lend to each other, by adding or withdrawing funds from their reserves at the central bank. This helps to stabilise the interest rate banks charge each other for short-term funds.
Until January 2012, banks had to hold a minimum of 2% of certain liabilities, mainly customers’ deposits, at their national central bank. Since then, this ratio has been lowered to 1%. The total reserve requirements for euro area banks stand at around 113 billion euro (beginning of 2016).
At the end of the maintenance period the central bank pays banks interest on their minimum reserve holdings – the interest rate is equivalent to the main refinancing operation (MRO) rate.
Reserve requirements are a standard monetary policy tool in central banking. However, some central banks do not have them at all, for example those in Australia, Canada and Sweden.
Source: European Central Bank
Published: 11 Aug 2016
The above presentation was created for educational purposes.