Euro area banks are required to hold a certain amount of funds in their current accounts at their national central bank (NCB) in the Eurosystem. These funds are called minimum reserves. Banks’ minimum reserve requirements are usually set for a period of six to seven weeks, known as the “reserve maintenance period”. Prior to the start of each reserve maintenance period, banks’ minimum reserve requirements are calculated as 1% of specific liabilities on their balance sheets – mainly customer deposits and debt securities with maturities of up to two years.
Banks have to make sure that the average level of the reserves on their current account meets their minimum reserve requirements over the maintenance period. Banks therefore do not need to hold the exact amount of minimum reserves throughout the maintenance period, which allows them to react to short-term changes in the money markets by adding to or withdrawing funds from their reserves. In turn, this helps to stabilise money market rates. The total minimum reserves of euro area banks are published daily in the liquidity analysis section of our website.
At the end of the maintenance period, euro area NCBs pay interest on the minimum reserves that banks hold with them. Until October 2022, the rate of interest paid was equal to the interest rate on the main refinancing operations. It was then reduced to the deposit facility rate, before being set at 0% in July 2023. Under the current rules, all funds on banks’ current accounts that exceed the minimum reserve requirements are remunerated at 0% when the deposit facility rate is above 0%, and at the deposit facility rate when it is below 0%.
If banks do not meet their minimum reserve requirements, under EU law the ECB has powers to impose a sanction that is proportional to the shortfall. There are many different reasons why banks may fail to fulfil their minimum reserve requirements, which are often linked to technical or operational errors rather than a bank’s lack of overall holdings of funds with the NCB. Banks can also hold funds in accounts other than the current account, for instance in the deposit facility. Thus, a breach of minimum reserve requirements does not necessarily mean that a bank did not have sufficient funds.
Source: European Central Bank
Published: 11 August 2016
Update Date: 8 November 2023
The above presentation was created for educational purposes.