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Analysis

Excess reserves with the ECB

by Gabriel Stein

Mon 14 Jul 2014

Excess reserves with the ECB Enlarge Chart loading Image

What the chart shows: The chart shows the excess reserves of euro area banks held with the ECB

Why the chart is important: In early June, the ECB introduced a number of monetary policy measures to try to avert threatening deflation and to boost the still weak EA recovery. One of these measures was the imposition of negative interest rates on excess reserves held by EA banks with the ECB. The reason behind this move was to make banks reallocate their reserves elsewhere, hopefully by buying other assets, thus boosting asset prices. (It was NOT to make banks lend these reserves out; this view is based on a complete misunderstanding of how banking works.)

In one sense, the negative interest rates have worked. Banks’ excess reserves with the ECB, which were €200bn in early May and still €125bn in early June, have all but disappeared, falling to around €25bn in June. What we do not yet know, however, is what banks have done with their money. If they have bought other assets, well and good. If they are merely holding cash, that would be almost meaningless. We will know at the end of the month, when data on the EA banking system balance sheet is published.

Chart and comments provided by Oxford Economics www.oxfordeconomics.com