ECB scraps interest on minimum reserve in hit to bank income

THE European Central Bank will stop paying banks for the money they are required to keep at the institution as a minimum reserve, a move that could cut into banks’ interest income.

The ECB “set the remuneration of minimum reserves at 0 per cent,” it said in a statement on Thursday (Jul 27) along with its monetary policy decision. The central bank had previously lowered the amount paid on minimum reserves. 

The move is likely to further reduce windfall profits from interest rate increases to lenders, who have benefited over the past year as they were able to earn more for loans while keeping rates 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. 

“This decision 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. BLOOMBERG