Reuters reported the ECB is weighing an increase in the Minimum Reserve Requirement (MRR), potentially in autumn, which would shift more bank reserves into a non-remunerated bucket. This contrasts with funds placed at the deposit facility, which currently pay 2.25%. ING estimates that doubling the MRR would cut ECB losses by close to €4bn a year, with larger savings if policy rates rise. With excess liquidity at €2.2tr, the implied €174bn one-off reduction in excess reserves may look modest, yet it could move conditions closer to a zone where funding rates become more reactive; market pricing reflected this as Euribor/OIS spreads edged slightly higher after the headlines.
The liquidity impact would be uneven across the Eurosystem. Italy, Spain and Portugal hold excess liquidity around 3 to 6 times their MRR, while France and Germany are closer to 15 times, implying a tighter squeeze in some jurisdictions. Distribution is also skewed by bank: some institutions holding excess liquidity are not the ones carrying the deposits used to calculate MRR, while smaller banks with disproportionately large deposit bases would face higher requirements. The broader policy trajectory remains a shift towards lower excess reserves, greater reliance on ECB liquidity operations, and short-term funding rates drifting closer to the MRO, supported by long-term operations and a smaller bond portfolio.
ECB Policy Shift and Liquidity Implications
We are watching reports that the European Central Bank may raise the amount of reserves banks must hold, potentially this autumn. This move would not pay interest to the banks, effectively tightening financial conditions and reducing excess liquidity in the system. While the total reduction seems small against the €2.2 trillion of excess liquidity, it signals a clear direction of travel from the ECB.
This shift suggests that we should expect higher short-term funding costs in the coming months. The gap between the 3-month Euribor rate and the overnight €STR rate, a key measure of banking system stress, has already widened to 14 basis points from 10 basis points in the last quarter. We believe derivative positions should be adjusted to profit from this spread widening further as liquidity becomes more scarce.
Market Impact, Precedent and Trading Strategy
Historically, we have seen this play out before, such as during the accelerated repayment of the ECB’s long-term loans (TLTROs) in 2023, which drained liquidity and pushed money market rates higher. That period saw the Euribor-€STR spread double in a matter of months, providing a clear precedent for what we might expect now. This past performance indicates that even a modest liquidity withdrawal can have an outsized impact on key funding rates.
The impact will not be uniform, creating opportunities for relative value trades. We note that banks in Italy and Spain hold far less excess liquidity relative to their reserve requirements compared to those in Germany and France. We can therefore expect greater funding pressure on these peripheral banking systems, a view supported by recent data showing a 3% rise in their use of ECB marginal lending facilities over the past month.
In the coming weeks, we should position for this shift by focusing on interest rate derivatives maturing in late 2026 and early 2027. This involves entering trades that benefit from a higher Euribor fixing, such as paying fixed on interest rate swaps or buying fourth-quarter Euribor futures contracts. These positions anticipate that the market is currently underpricing the impact of the ECB’s move towards a less abundant liquidity environment.
