The European Central Bank will stop paying banks for the money they are required to keep at the institution as a minimum reserve, a surprise move that could cut billions from lenders’ interest income.
(Bloomberg) — The European Central Bank will stop paying banks for the money they are required to keep at the institution as a minimum reserve, a surprise move that could cut billions from lenders’ interest income.
Europe’s banks most recently were required to stash about 165 billion euros at the ECB as minimum reserves, according to data through June 20 on the central bank’s website. The central bank paid 3.25% on that amount, translating into annual income of about 5.4 billion euros ($6 billion).
The payment was tied to the deposit facility rate, which was raised to 3.5% on June 21. The ECB severed that link on Thursday, a change that will become effective on Sept. 20.
European bank stocks reversed gains after the decision, with the Stoxx 600 Europe Banks Index little changed at 3:05 p.m. in Frankfurt after earlier gaining as much as 0.7%. Deutsche Bank AG saw one of the steepest declines, falling as much as 4.7%. The German lender yesterday gave an upbeat interest income outlook when it presented second-quarter results.
Europe’s lenders have benefited from the ECB’s rate hikes over the past year as they were able to charge more for loans while keeping the amount paid on deposits near zero. That effect, however, is beginning to taper off as funding costs rise among competition for deposits, while demand for loans is fading.
Read More: Deutsche Bank Feels Flip Side of Rate Hikes as Loans Deteriorate
“Paying a zero rate on minimum reserves was unexpected,” Deutsche Bank Chief European Economist Mark Wall said in a reaction note. “It’s a slight further tightening of the stance.”
The ECB had already lowered the amount paid on minimum reserves before. The latest move “will preserve the effectiveness of monetary policy by maintaining the current degree of control over the monetary policy stance and ensuring the full pass-through of the interest rate decisions to money markets,” the ECB said.
“At the same time, it will improve the efficiency of monetary policy by reducing the overall amount of interest that needs to be paid on reserves,” it said on its website.
(Updates with effective date in third paragraph. A previous version of this story was corrected to clarify that the ECB had raised the rate on minimum reserves to 3.5% on June 21.)
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