Chapter 7 - Minimum Reserves
7.1 General Considerations
According to Article 19.1 of the ESCB/ECB Statute, the ECB may require credit institutions5 to hold minimum reserves on accounts with the national central banks within the framework of the ESCB's minimum reserves system. The legal framework for the ESCB's minimum reserve system is laid down in Article 19 of the ESCB/ECB Statute and related complementary legislation (the Council Regulation (EC) concerning the application of minimum reserves41 and the ECB Regulation on minimum reserves). The terms and conditions of the ESCB's minimum reserves system are uniform throughout the euro area.
The amount of minimum reserves to be held by each institution is determined in relation to its reserve base. The ESCB's minimum reserves system enables counterparties to make use of averaging provisions, implying that compliance with reserve requirements is determined on the basis of the average of the end-of-calendar-day balances on the counterparties' reserve accounts over a one-month maintenance period.
The ESCB's minimum reserves system may be used primarily to pursue the following monetary functions:
- Stabilisation of money market interest rates
The averaging provision of the ESCB's minimum reserves system aims to contribute to the stabilisation of money market interest rates by giving institutions an incentive to smooth the effects of temporary liquidity fluctuations. - Creation or enlargement of structural liquidity shortage
The ESCB's minimum reserves system contributes to creating or enlarging a structural liquidity shortage. This may be helpful in order to improve the ability of the ESCB to operate efficiently as a supplier of liquidity. - Control of monetary expansion
The ESCB's minimum reserves system may contribute to the control of monetary expansion primarily by increasing the interest rate elasticity of money demand.
In the application of minimum reserves, the ECB is bound to act in pursuance of the objectives of the ESCB as set out in Article 105(1) of the Treaty and Article 2 of the ESCB/ECB Statute, which implies, inter alia, the principle of not inducing significant undesirable delocation or disintermediation.
7.2 Institutions Subject to Minimum Reserves
Pursuant to Article 19.1 of the ESCB/ECB Statute, credit institutions established in Member States are subject to the ESCB's minimum reserves system5. This implies that branches in the euro area of entities with no registered office in the euro area are also subject to the ESCB's minimum reserves system. However, branches located outside the euro area of credit institutions established in the euro area, are not subject to the ESCB's minimum reserves system.
The ECB may exempt institutions under winding-up or reorganisation from their obligations under the ESCB's minimum reserves system. According to the Council Regulation (EU) concerning the application of minimum reserves, the ECB may also exempt classes of other institutions from their obligations under the ESCB's minimum reserves system on a non-discriminatory basis if the purposes of the ESCB's minimum reserves system would not be met by imposing them on those particular institutions.
The ECB establishes and maintains a list of institutions subject to the ESCB's minimum reserves system. The list is available to the public. The ECB will also make public a list of any institutions exempt from their obligations under the ESCB's minimum reserves system for reasons other than their being subject to reorganisation measures.
7.3 Determination of Minimum Reserves
a. Definition of the reserve base
The reserve base of an institution is defined in relation to elements of its balance sheet. The balance sheet data are reported to the national central banks within the general framework of the ECB's money and banking statistics (see Section 7.5)42. For institutions subject to full reporting requirements, the balance sheet data referring to the end of a given calendar month are used to determine the reserve base for the maintenance period starting during the following calendar month.
The reporting framework for the ECB's money and banking statistics includes the possibility to relieve small institutions from some of the reporting burden. Institutions to which this provision applies would only need to report a limited set of balance sheet data on a quarterly basis (as end-of-quarter data) and with a reporting deadline which is one month longer than that set for larger institutions. For these institutions, the balance sheet data reported for a specific quarter would be used to determine, with a lag of one month, the reserve base for the consecutive three one-month reserve maintenance periods.
According to the complementary legislation to Article 19 of the ESCB/ECB Statute, the ECB is entitled to include liabilities resulting from the acceptance of funds together with liabilities resulting from off-balance-sheet items in the reserve base of institutions43. Liabilities vis-à-vis other institutions included in the list of institutions subject to the ESCB's minimum reserves system and liabilities vis-à-vis the ECB and the national central banks are not included in the reserve base. For the liability categories debt securities issued and money market paper issued, the issuer needs to prove the actual amount of these instruments held by other institutions subject to the ESCB's minimum reserves system in order to be entitled to deduct them from the reserve base. If such proof cannot be presented, issuers may apply a standardised deduction of a fixed percentage (to be specified by the ECB) to these balance sheet items.
The ECB may decide to define certain eligible liabilities in net terms and may exclude from the reserve base liabilities which are a direct consequence of ESCB monetary policy operations. Box 8 shows balance sheet items potentially included in the reserve base.
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A. Eligible on-balance sheet liabilities44 (Including foreign currency liabilities)
B. Liabilities excluded from the reserve base
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b. Reserve ratios
The reserve ratios are determined by the ECB. The ECB may apply a uniform reserve ratio to the whole reserve base or differentiate reserve ratios across categories and maturities of eligible liabilities. The ECB may at any time change the reserve ratios. Changes in the reserve ratios will be announced by the ECB in advance of the first maintenance period for which the change is effective.
c. Calculation of reserve requirements
The reserve requirement of each individual institution is calculated by applying, to the amount of eligible liabilities, the reserve ratios for the corresponding categories of liabilities. The ECB may allow a uniform lump sum allowance either from the counterparties' reserve requirement or from their reserve base. The granting of such an allowance shall be without prejudice to the legal obligations of institutions subject to the ESCB's minimum reserves system.
7.4 Maintenance of Reserve Holdings
a. Maintenance period
The maintenance period is one month, starting on a fixed date each month (e.g. starting on the 24th of each month and ending on the 23rd of the following month).
b. Reserve holdings
Each institution must hold its minimum reserves on a reserve account with the national central bank in the Member State in which it is established. For institutions with more than one establishment in a Member State, the head office is responsible for fulfilling the aggregate minimum reserves of all the domestic establishments of the institution45. An institution with establishments in more than one Member State is required to hold minimum reserves with the national central bank of each Member State in which it has an establishment, in relation to its reserve base in the corresponding Member State.
Institutions' settlement accounts with the national central banks may be used as reserve accounts. Reserve holdings held on settlement accounts may be used for intraday settlement purposes. The daily reserve holding of an institution is calculated as the end-of-day balance on its reserve account.
An institution may apply to the national central bank in the Member State in which the institution is resident for permission to hold all its minimum reserves indirectly through an intermediary. The possibility of holding minimum reserves through an intermediary is as a rule restricted to institutions which are constituted so that part of the administration (e.g. treasury management) is normally effected by the intermediary (e.g. networks of savings banks and co-operative banks may centralise their reserve holdings). The ECB rules for holdings of minimum reserves through an intermediary are contained in Annex 3.
c. Remuneration of reserve holdings
The ECB may decide to remunerate institutions' reserve holdings. If the ECB decides to remunerate minimum reserves, the rate of interest will be set according to a fixed formula related to a market rate or an official interest rate chosen by the ECB.
7.5 Reporting and Verification of the Reserve Base
The reserve base for the application of minimum reserves is calculated on the basis of the reporting provided by monetary financial institutions to national central banks within the general framework of the ECB's money and banking statistics (see Annex 5).
For institutions that are allowed to act as intermediaries for indirect reserve holdings of other institutions, special reporting requirements are specified in the ECB rules for holdings of minimum reserves through an intermediary (see Annex 3). The holding of reserves through an intermediary does not change the statistical reporting obligations of institutions holding reserves via an intermediary.
The ECB and the national central banks have the right, within the scope of complementary legislation to Article 19.2 of the ESCB/ECB Statute, to verify the accuracy and quality of collected data.
7.6 Non-Compliance with Minimum Reserve Obligations
Non-compliance with the minimum reserve obligations arises if an institution's average end-of-calendar-day balance on its reserve account(s) over the maintenance period is less than its reserve requirement for the corresponding maintenance period.
Where an institution fails to maintain all or part of the reserve requirement, the ECB may, in accordance with Article 19.1 of the ESCB/ECB Statute and related complementary legislation, impose sanctions either in the form of a penalty related to the interest rate on the marginal lending facility or as a requirement for the institution to establish non-interest-bearing deposits with the ECB or the national central banks.
Where an institution fails to comply with other obligations under ECB regulations and decisions related to the ESCB's minimum reserves system (e.g. if relevant data are not transmitted in time or are not accurate), the ECB is empowered to impose sanctions in accordance with complementary legislation to Article 34.3 of the ESCB/ECB Statute.
In addition, the ECB may, in accordance with provisions in the contractual and regulatory arrangements applied by national central banks, suspend counterparties' access to the ESCB's standing facilities and open market operations in the event of non-compliance with obligations under the ESCB's minimum reserves system. The ECB may also require institutions which do not comply with these obligations to fulfil their reserve requirements each day, thus suspending their opportunity to make use of the averaging provision.
ECB - European Central Bank