Minimum reserve requirement

The minimum reserve is the share of customer deposits that commercial banks must hold as a reserve at the central bank.

Current rules (ECB):

• Minimum reserve ratio: 1% (since 2012, previously 2%)
• Basis: certain liabilities (overnight deposits, time deposits up to 2 years)
• Remuneration: 0% since September 2023 (previously at the deposit facility rate)

How does it work?

• If a bank has 10 billion euros of customer deposits, it must park 100 million euros (1%) at the ECB
• With the rest (99%), it can grant loans and make investments

Purpose of the minimum reserve:

• Limit money creation: without a minimum reserve, banks could theoretically create unlimited credit
• Stability: a buffer for unexpected withdrawals
• Monetary policy: the ECB can steer lending by changing the ratio

Creation of book money (money multiplier):

In theory, with a 1% minimum reserve, €100 of central bank money can create up to €10,000 of book money (multiplier = 1/0.01 = 100). In practice, however, many other factors limit this.

International comparison:

• ECB: 1%
• USA (Fed): 0% (abolished since March 2020!)
• China: ~7.5% (much more restrictive)