What is the purpose of financial institutions

What is the minimum reserve requirement?

11th August 2016

Banks in the euro area are required to hold a certain amount of funds as deposits in an account with their respective national central bank. These deposits are called the “minimum reserve”. A bank's minimum reserve requirement is set for six weeks at a time - the so-called minimum reserve period. The minimum reserve requirement is calculated on the basis of the balance sheet of the respective bank before the start of the minimum reserve period.

Banks must ensure that they meet the minimum reserve requirement on average within the reserve period. So you don't have to keep the total amount in your central bank account every day. The whole thing works like a valve: the banks can react to short-term changes in the money markets, where banks lend each other money. They can withdraw funds from or transfer funds to their minimum reserve held with the central bank. This helps stabilize the interest rate that banks charge each other for short-term lending of funds.

Until January 2012, the minimum reserve to be held by banks was subject to a rate of 2% on certain liabilities (primarily customer deposits). This rate has now been reduced to 1%. The minimum reserve requirement of all banks in the euro area was around € 113 billion at the beginning of 2016.

At the end of the reserve period, the central bank pays the banks interest on the reserve held, the interest rate being the main refinancing rate.

The minimum reserve requirement is regarded by central bankers as a standard instrument of monetary policy. However, some central banks, such as the Reserve Bank of Australia, the Bank of Canada or the Sveriges riksbank, do not use this instrument.