Banks face ECB reserve shift as cash rule may double to 2%

ECB officials are weighing higher reserve requirements that would make eurozone banks park more cash without interest, reshaping liquidity.

Six people familiar with the discussions said policymakers are considering an increase in minimum reserves to 2% from 1% of customer deposits and some other bank funding. The idea is still at an early stage, has not been formally taken up by the Governing Council, and could face a decision by autumn.

A 2% cash rule

The proposal would double the share of eligible bank funding that lenders must keep in an unremunerated account at the central bank. For banks, the immediate effect would be a larger pool of cash earning nothing rather than interest through other central bank facilities.

For the ECB system, the attraction is cost control. Higher mandatory reserves would reduce the amount of bank money on which central banks pay interest, easing losses that have followed the sharp rise in policy rates used to fight inflation.

Trillions from bond purchases

The issue stems from the liquidity created during years of asset purchases. Bond-buying programmes over the past decade left banks with excess deposits at central banks that grew into the trillions of euros, according to the people familiar with the debate.

Those reserves became more expensive for central banks once interest rates rose. In cash-rich countries such as Germany, the cost of remunerating bank deposits above mandatory reserve levels has weighed on central bank income and sharpened the case for changing the rules.

Banks lose a paid buffer

If adopted, the change would shift income from commercial lenders toward the central bank system by turning more balances into unpaid reserves. Deposit-heavy banks would feel the mechanism most directly because their customer funding forms part of the base used to calculate reserve requirements.

The sector risk is that banks treat the measure as a tax-like cost and push back through pricing, lobbying, or balance-sheet adjustments. The policy risk is narrower but important: a larger reserve requirement could drain liquidity faster than intended if it interacts poorly with money-market conditions.

Germany illustrates the pressure

Germany is central to the debate because it is one of the cash-rich eurozone economies where central bank losses from paid deposits have been most visible. A higher reserve ratio would not remove the excess liquidity created by past stimulus, but it would reduce the part of that liquidity that earns interest.

The timing also fits a wider ECB review of how banks access central bank cash. That review is expected this year and is aimed at rethinking the operating framework after a long period in which abundant liquidity shaped money markets, bank funding, and policy transmission.

Three paths into autumn

If the ECB raises the ratio to 2%, eurozone liquidity would tighten at the margin while the central bank system lowers its interest bill. For the ECB, the mechanism improves income by shrinking paid balances; for banks, it reduces earnings on reserves; for the wider sector, it favors lenders with lower reserve exposure.

If policymakers delay or soften the move, the global macro signal would be continuity rather than tightening, with little immediate change to euro liquidity. The ECB would keep carrying more of the interest cost, banks would preserve more paid balances, and the industry would avoid a sudden adjustment before the framework review is complete.

If opposition pushes the debate into a broader redesign, the effect would depend on the new liquidity tools chosen. The ECB could gain a more durable operating model, banks would face a longer period of uncertainty, and global investors would read the outcome as a test of how major central banks manage the fiscal side effects of high rates.