The last major monetary aid to banks is over. The European Central Bank (ECB) has taken the decision to stop paying banks for the money they are obliged to keep in the institution as a minimum reserve, which will reduce by billions of euros the interest income of European banks. The sector has enjoyed since 2020 extraordinary liquidity measures (TLTRO, PLTRO) and the subsidy of its intermediation activity but now all this ends.
The measure will be effective from September 20. Credit institutions are required to hold a minimum amount equivalent to 1% of specific liabilities, mainly customer deposits. The minimum reserves are currently remunerated at the interest rate of the deposit facility (DFR) of the ECB, which has risen this Thursday from 3.75% to 4%.
Currently, European banks must keep around €165 billion at the ECB as minimum reserves, Bloomberg reports. Before Thursday’s decision, the ECB paid an interest of 3.75% on these reserves (4% as of August 2), which represents an annual income that exceeds 6,000 million euros that all European banks will lose. In October 2022, the central bank already lowered this extraordinary remuneration from the main funding rate to the deposit rate, which is steadily a quarter of a point below the previous one.
“Under the current conditions of ample liquidity, the interest paid on the reserves that banks hold in the ECB’s deposit facility – that is, reserves above the minimum required level – is the Governing Council’s main instrument for setting the monetary policy stance in its fight against inflation,” the agency said in its statement.
Decline in the banking stock market
“Today’s decision to reduce the remuneration of minimum reserves will preserve the effectiveness of monetary policy by maintaining the current degree of control over the policy stance and ensuring the full transmission of interest rate decisions to money markets. At the same time, it will improve the efficiency of monetary policy by reducing the total amount of interest that must be paid on reserves to implement the appropriate stance.”
The shares of European banks have reacted negatively and have gone from rising to falling after the decision. The Stoxx 600 Europe Banks sub-index fell 0.1% shortly before the European close after rising about 1% in the morning. Deutsche Bank was the one that suffered the most on the stock market with a decrease of 2.8%, followed by Commerzbank (-1.3%), Caixabank (-1%) and Bankinter (-0.4%).
European banks have taken advantage of the ECB’s interest-rate hike cycle since July 2022 to charge more for loans while keeping remuneration on their customers’ deposits close to zero. This has boosted their margins at a record pace over the past few quarters. However, both the ECB and policy makers have criticized this activity and have pushed the sector to raise the interest on its customers’ money. Now they will be forced to do so after the central bank’s move.
