ECB’s Holzmann Renews Idea of Tenfold Hike in Minimum Reserves

(Bloomberg) -- A jump of as much as ten times in the amount of money lenders must park interest-free at the European Central Bank would ease financial pain for the euro area’s national central banks, Austrian policymaker Robert Holzmann said.

“A rate of 5% to 10% of unremunerated minimum reserves would reduce substantially the high implicit subsidy commercial banks currently receive while strengthening the balance sheet of central banks,” the ECB Governing Council member said Thursday.

Firms must currently hold 1% of certain liabilities — mostly customer deposits — at the ECB as so-called Minimum Reserve Requirements, or MRR.

In a presentation in London, Holzmann said that for some national central banks “it may take years” to overcome the losses they’re currently enduring, and even until the 2040s to re-establish reserves. That could undermine their independence, he warned.

Holzmann already floated the idea of an MMR increase of this size in 2023, causing outcry from bank lobbyists who argued that the step would be equivalent to a tax and would impair lending. Bundesbank’s Joachim Nagel has also indicated in the past that he’d support a move higher.

Last year, though, the ECB decided to keep the MMR at 1% when it finalized the review of its operational framework. It’s currently in the midst of looking at its monetary-policy strategy again, but this issue is unlikely to be part of the discussion.

Central-bank finances in the euro zone – and globally – have suffered from the combined effects of large asset-purchase programs conducted when inflation was low and rapidly rising interest rates after the pandemic.

In February, Germany’s Bundesbank reported a shortfall of €19.2 billion ($20.1 billion) for 2024 — its first since the 1970s and its highest ever. Nagel said losses have probably peaked and that they’ll be carried forward and offset by future profits.

Like other ECB officials, he’s stressed that it’s not the central bank’s task to make profits but to secure price stability, and that losses don’t affect its ability to act. In November, however, Executive Board member Isabel Schnabel also said “there can be a hit to credibility, even if central banks are not profit-maximizing institutions.”

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