German banks reject ECB plan to double reserve requirements

The European Central Bank is weighing a plan to double the share of cash that eurozone lenders must park in unremunerated accounts, a move that has drawn swift opposition from Germany's banking industry.

The Proposal

Six sources told Reuters on Monday that ECB policymakers are debating whether to raise minimum reserve requirements to 2% from 1% of banks' customer deposits and certain other forms of funding. The measure would help reduce the Eurosystem's annual interest expenses on excess reserves, which currently total roughly €48.7 billion a year based on a 2.25% deposit facility rate applied to some €2.16 trillion in excess liquidity. Doubling mandatory reserves from the current €173.56 billion would cut the combined annual interest bill of the ECB and its 21 national central banks by nearly €4 billion.reuters+1

The proposal has not yet been formally discussed by the ECB's Governing Council, and sources described the internal deliberations as being at an early stage. A decision is expected before autumn.reuters

German Banks Sound the Alarm

The Association of German Banks wasted no time in voicing its objections. In a statement on Wednesday, the group's chief executive Heiner Herkenhoff called the potential increase effectively a tax on European lenders that would cause them to "fall further behind in global competition".globalbankingandfinance

"It will tie up additional liquidity, weaken the institutions' profitability, and reduce their scope for investment and lending," Herkenhoff said. "Especially at a time of growing geopolitical uncertainties, Europe needs strong and competitive banks, not additional competitive disadvantages".globalbankingandfinance

The reserve ratio stood at 2% when the eurozone launched in 1999 and was halved to 1% in January 2012. Since July 2023, required reserves have been remunerated at 0%, meaning any increase directly reduces banks' earning power on the funds affected.ecb.europa+1

A Familiar Tension

The debate echoes a similar clash in 2023, when German banks opposed the ECB's decision to stop paying interest on mandatory reserves altogether. Analysts have estimated that a one-percentage-point increase in required reserves could reduce eurozone banks' net interest income by roughly 1.7% and pre-tax profits by about 3.3%, with effects varying by jurisdiction. The proposal surfaced during the ECB's annual forum in Sintra, Portugal, where policymakers gathered this week to discuss the economic outlook amid elevated inflation and trade-related uncertainty.bloomberg+2