Exclusive-ECB considering several options to mitigate losses, sources say

By Balazs Koranyi and Francesco Canepa

FRANKFURT, July 23 (Reuters) - The European Central Bank is considering several options to mitigate its financial losses, in a tense debate that is expected to come to a head in the autumn, four sources said.

ECB President Christine Lagarde confirmed on Thursday that policymakers would discuss raising minimum reserve requirements, which means increasing the amount of cash banks must keep in an unremunerated account as a buffer in case of a liquidity crunch.

Alternative options include not paying interest to banks on some of their excess reserves, which means applying a tiered rate in market jargon, or even charging them fees, the sources said.

All these moves would ease the financial burden on national central banks, helping offset some losses resulting from the ECB's stimulus policies of the last decade.

The debate among ECB policymakers over this politically sensitive subject is wide open and more suggestions could surface before a decision is made, the sources told Reuters.

A spokesperson for the ECB declined to comment.

MINIMUM RESERVES ON THE TABLE

Commercial banks must currently keep 1% of their deposits and some other short-term liabilities in reserve at their respective central banks, which do not remunerate them.

Doubling that to 2% would save the ECB and the 21 national central banks of the Eurosystem nearly €4 billion ($4.55 billion) per year, according to Reuters calculations.

This would force a few banks to raise cash to meet the new requirement, even though the majority are above that level.   

REVIVING TIERED DEPOSIT RATE

The ECB could also stop remunerating some of the reserves that banks have in excess of requirements, the sources added.

Commercial banks currently earn a 2.25% rate on every euro they deposit above the required minimum. 

That leaves the Eurosystem paying interest of nearly €50 billion per year on just over €2 trillion worth of liquidity.

This tiered rate would be a less painful alternative for euro zone banks.

But the minority that have liquidity of less than 2% would receive no interest from the Eurosystem, giving them an incentive to transfer reserves to banks that already clear that threshold, the sources said.

That would result in both receiving a payout, while the Eurosystem's interest bill would not fall, they added.   

CHARGING FEES?

Among the quirkier options, some within the ECB have floated the idea of scrapping minimum reserve requirements altogether and instead charging banks fees, the sources said.

For some governors, the issue with tinkering with reserve remunerations to mitigate losses is that it uses a central bank tool to achieve a goal that has more to do with fiscal than monetary policy.

A loss-making central bank is less able to pay dividends to its national government and, in extreme circumstances, may even have to ask it for a capital increase. 

Central banks such as the Bundesbank have avoided doing so by staggering their losses. 

These are the result of the large pile of cash injected into the banking system by the ECB itself from 2015 to 2022, when the euro zone central bank was trying to stimulate economic activity and avert the threat of deflation via massive bond purchases.

Some of the debt bought by national central banks in high-rated countries had low or negative yields. These central banks were then left nursing heavy losses when the ECB raised its deposit rate to combat high inflation from 2022 to 2023. 

Some of these bonds have since matured, lowering the amount of reserves in the system and making a decision on remuneration less pressing for some governors.

($1 = 0.8792 euros)

(Reporting by Francesco Canepa; Editing by Alexander Smith)