ING strategists Benjamin Schroeder and Michiel Tukker discuss how a potential increase in the Minimum Reserve Requirement (MRR) by the ECB could tighten Eurozone liquidity and reduce ECB losses.
They highlight uneven distribution of excess reserves across countries and banks, and warn that accelerating the move to lower excess reserves risks disrupting the ECB’s gradual monetary policy transition
ECB liquidity framework and MRR risks “Reuters reported yesterday that the ECB was considering raising the amount of reserves banks are required to hold at the ECB on average – not immediately, but potentially in autumn. Crucially, this Minimum Reserve Requirement (MRR) is not remunerated, unlike reserves parked at the deposit facility, which currently earns banks 2.25% in interest. Doubling the MRR is estimated to save the ECB close to €4bn annually, and more if interest rates were to be increased further.” “With excess liquidity currently at €2.2tr, the impact of a €174bn one-off reduction, which the doubling of the MRR would effectively result in, could be expected to be marginal.
It would push us closer to a level of excess liquidity where funding rates are anticipated to react more sensitively to any changes, though. And we saw market expectations of Euribor/OIS spreads already nudge slightly higher on the back of the headlines.” “On a country level, we can see that Italy, Spain and Portugal hold excess liquidity to the tune of 3 to 6 times their respective MRR, whereas we are looking for multiples close to 15 for e.g. France and Germany.