The ECB requires that credit institutions hold compulsory deposits on account with their local central bank, called minimum, or required, reserves. Reserve requirements have two functions:
- Buffering; holding funds on account with the Bank provides a buffer against liquidity shocks
- Create a liquidity deficit; reserve requirements increase the demand for central bank liquidity. In order to fulfil the higher reserve requirements, central banks have to provide the banking system with the necessary liquidity. It is deemed easier to influence money market rates when the banking system has a structural liquidity deficit vis-a vis the central bank.
In the Eurosystem, we principally use minimum reserves as buffers since the liquidity deficit in the Eurosystem is already quite extensive.
The required amount to be held by each institution is determined as a function of the institution’s reserve base. The reserve base is defined as liability items on the institution’s balance sheet, including deposits and debt securities issued. Currently, this reserve ratio is at 1 per cent.
Compliance with reserve requirements
Compliance with reserve requirements is determined on the basis of an institution's average daily reserve holdings over a one-month maintenance period. Required reserves are remunerated at a rate based on the main refinancing operations rate, and thus close to market rates. However, balances held in excess of requirements, i.e. excess reserves, are not remunerated. It is therefore in a credit institution’s best interests to actively manage the minimum reserve account. When an institution fails to meet its minimum reserve obligations, sanctions may be imposed.
Minimum Reserve Maintenance Period and Remuneration Rate
- Maintenance Period (15 January 2014 – 11 February 2014)
- Remuneration Rate: 0.25%
Indicative Reserve Maintenance Period Calendar
- An indicative calendar of reserve maintenance periods can be found here.
See Annual Reports in our Corporate Publications section for further information.