Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The billions of euros being earned by Europe’s commercial lenders in interest on their vast deposits at central banks is penalising savers, the head of the Bundesbank has said.
Joachim Nagel told an audience of mostly bankers in Frankfurt that the region’s lenders had become “less reliant on customer deposits than they used to be”. The reason for that was the “significant” excess of reserves they still held at central banks across the region — a side-effect of years of aggressive monetary easing by the European Central Bank.
Those excess reserves, which amount to almost €4tn, accrue interest at the ECB’s deposit rate of 4 per cent, reducing the pressure to compete for savers’ cash by raising rates on deposits.
Nagel said the policy was impeding the “transmission” of higher policy rates to the real economy by removing incentives for banks to change their lending behaviour.
The comments put the Bundesbank president at odds with other rate-setters. While he is backed by some national central bank bosses, such as Austria’s Robert Holzmann, the idea has not gained enough support at the ECB.
Some policymakers view the calls as a thinly veiled attempt to reduce the big losses being recorded by national central banks due to the large amounts of interest they have to pay commercial lenders. The Bundesbank warned this year that its expected losses would “probably” wipe out its €19.2bn of provisions and €2.5bn of capital.
ECB president Christine Lagarde said at a press conference after its policy meeting last month in Athens that ways to tackle the issue had not been discussed. She added: “It would be actually wrong if our decisions were guided by our profit and loss accounts rather than for pure monetary policy purposes.”
Commercial banks have parked €3.7tn at eurozone central banks in excess of the sums required by regulators.
“Interest rates on overnight deposits have barely increased since monetary policy tightening began,” Nagel told the European Banking Congress. “Since July 2022, banks have raised these rates, on average, by a meagre 30 basis points or so. This is less than what historical patterns would suggest. I know a lot of bank customers who are disappointed by this.”
Nagel called for the ECB to increase banks’ minimum reserve requirement, the amount of money they are required to hold at central banks, on which they receive zero interest.
“The minimum reserve requirement is a tried and tested monetary policy instrument that could help to counteract this effect,” he said. “At this point, I see no reason to rule out a moderate increase to improve the efficiency of monetary policy.”
The minimum reserve requirement is set at 1 per cent of banks’ liabilities, but Nagel pointed out that for the first 13 years after the euro’s launch in 1999, it had been 2 per cent.
The Bundesbank boss said its research found that banks with large amounts of excess reserves “saw a far stronger rise” in their net interest income, which is the difference between what they earn on loans and pay on deposits.
He also said it would be “unwise” for the ECB to start cutting rates “too soon”, adding that it was “highly improbable” that this would happen “anytime soon”.
Eric Dor, an economics professor at the IESEG School of Management in Paris, has calculated that the annual interest on commercial lenders’ eurozone central bank deposits is €48bn in Germany, €35bn in France, €13.4bn in the Netherlands, €9.2bn in Belgium, €8.6bn in Spain and €7.9bn in Italy.
