German banks oppose ECB plan to boost minimum reserves

Summary: Germany's main banking trade group has pushed back against a reported European Central Bank (ECB) proposal to increase banks' minimum reserve holdings. The Association of German Banks said the measure would harm lenders by tying up cash, cutting profitability and limiting their capacity to support lending and investment.

According to a Reuters report that cited sources, the ECB is considering raising the minimum reserve requirement to 2% from the current 1% level. The rule would apply to banks' customer deposits and certain other funding sources and would require financial institutions to hold a larger share of those liabilities in accounts that do not earn interest.

Heiner Herkenhoff, chief executive of the Association of German Banks, criticized the contemplated adjustment and set out the group's central objections. "It will tie up additional liquidity, weaken the institutions27 profitability, and reduce their scope for investment and lending," he said in a statement to Reuters. He added that tighter requirements would exacerbate what he described as a de facto tax on European banks and cause them to "fall further behind in global competition."

ECB officials are reported to be discussing the potential change. The proposed increase in reserve ratios would also have the effect of lowering the ECB's interest expenses and reducing some side effects associated with its measures to control inflation, the report said. Policymakers at the central bank have not finalized a decision, and discussions are ongoing.

The Association of German Banks framed its opposition around operational and competitive impacts for lenders, emphasizing the immediate hit to available liquidity and profitability that would result if institutions had to hold more non-interest-bearing reserves. The trade group presented these points as direct consequences of the reported proposal rather than asserting any unreported secondary outcomes.

With ECB deliberations continuing, the banking sector remains attentive to any official move that would alter reserve mechanics. The Association of German Banks' public statement makes clear the group's concern that the specific change under discussion would tighten banks' funding positions and affect their capacity to deploy capital.

Key points

• The ECB is reportedly considering raising minimum reserve requirements to 2% from 1% of customer deposits and certain funding sources.
• The Association of German Banks warns the change would tie up liquidity, weaken profitability and reduce banks' scope for investment and lending.
• If implemented, the shift would lower the ECB's interest expenses and could reduce some side effects of its inflation-control measures.

Risks and uncertainties

• Operational and funding pressure on banks: higher minimum reserves would require holdings of non-interest-bearing cash, constraining liquidity for lending and investment - affects banking and credit markets.
• Competitive disadvantage: the Association of German Banks warns the move would act like a tax and potentially cause European banks to lag in global competition - affects financial services and capital markets.
• Policy uncertainty: ECB policymakers are still discussing the adjustment, so the final shape and timing of any change remain uncertain - affects market planning and regulatory expectations.