ING strategists Benjamin Schroeder and Michiel Tukker analyzed the potential impact of the European Central Bank (ECB) considering an increase in the Minimum Reserve Requirement (MRR) for Eurozone banks, as reported by Reuters. The ECB is not expected to implement this change immediately, but possibly in the autumn. The MRR is not remunerated, unlike reserves held at the ECB's deposit facility, which currently earn banks 2.25% interest. Doubling the MRR could save the ECB close to €4 billion annually, with potential for greater savings if interest rates rise further [1].
Currently, excess liquidity in the Eurozone stands at €2.2 trillion. A doubling of the MRR would result in a one-off reduction of €174 billion in excess liquidity. While this impact is expected to be marginal in the context of total liquidity, it would bring the system closer to a threshold where funding rates become more sensitive to changes. Market expectations have already seen Euribor/OIS spreads nudge slightly higher following the news [1].
The distribution of excess liquidity is uneven across countries and banks. Italy, Spain, and Portugal hold excess liquidity at 3 to 6 times their respective MRR, while France and Germany have multiples close to 15. Redistribution of liquidity within the Eurosystem is currently functioning relatively smoothly, but some jurisdictions could experience a greater squeeze if the MRR is increased. Additionally, liquidity is not proportionally distributed among banks; smaller banks with larger deposits could be penalized by the change, as those holding excess liquidity are not necessarily the same as those holding the deposits that determine MRR calculations [1].
The ECB's long-term goal is to reduce excess reserves in the banking system to levels determined by banks themselves, with ECB liquidity operations becoming a more integral part of banks' liquidity planning. This would likely result in higher short-term market funding rates closer to the Main Refinancing Operations (MRO) rate, with more reliance on ECB liquidity operations and a smaller bond portfolio covering structural liquidity needs [1].
CONCLUSION
The ECB's consideration of doubling the Minimum Reserve Requirement could marginally tighten Eurozone liquidity and reduce ECB losses, but may also lead to higher funding rates and uneven impacts across countries and banks. Market reactions have already reflected a slight increase in Euribor/OIS spreads. The move aligns with the ECB's broader strategy to normalize liquidity conditions and make banks more reliant on ECB operations.