German banks reject ECB's potential move to lift minimum reserves

FRANKFURT, July 1 (Reuters) - A top industry association of German banks on Wednesday firmly rejected a potential increase by the European Central Bank in the amount of cash lenders must keep on reserve in unremunerated accounts.

Reuters reported on Tuesday that the ECB is considering doubling the proportion of funds lenders must maintain on reserve in the accounts, a move that would cut the central bank's own interest bill and mitigate the side effects of its inflation fight.

But Heiner Herkenhoff, chief executive of the Association of German Banks, said a stricter requirement would exacerbate what is essentially a tax on European banks, prompting them to "fall further behind in global competition".

"It will tie up additional liquidity, weaken the institutions' profitability, and reduce their scope for investment and lending," he said in a statement to Reuters.

The potential increase, which is being debated by ECB policymakers, would raise minimum reserve requirements to 2% from 1% of banks' customer deposits and some other forms of funding, sources told Reuters.  

"Especially at a time of growing geopolitical uncertainties, Europe needs strong and competitive banks, not additional competitive disadvantages," Herkenhoff added.

A decision over the potential move, which has not been formally discussed by the ECB's Governing Council, is expected by the autumn. The sources said that the discussion within the ECB was at an early stage.

(Reporting by Tom Sims, editing by Thomas Seythal)