Commerzbank AG Chief Financial Officer Bettina Orlopp came out strongly against forcing lenders to hold more cash at the European Central Bank, a demand made by some top monetary policy officials.
(Bloomberg) — Commerzbank AG Chief Financial Officer Bettina Orlopp came out strongly against forcing lenders to hold more cash at the European Central Bank, a demand made by some top monetary policy officials.
“There is this crazy debate” about increasing the so-called minimum reserve requirement, Orlopp said Thursday at a conference hosted by S&P Global Ratings in Frankfurt. “The craziest proposal” was a call to raise the amount to 10% from the current level of 1%, she said.
Orlopp’s criticism is the strongest to date from the banking industry after some ECB Governing Council members recently voiced support for higher reserve requirements. The backers say it’s a way to reduce liquidity in the banking system, which would strengthen the central bank’s tightening monetary policy.
The most extreme demand has come from Austrian Central Bank Governor Robert Holzmann, who has proposed raising the reserve requirement to as much as 10%. Unidentified members of the Governing Council have floated an increase to 2%, according to the central bank’s July meeting notes, published in late August.
Read More: ECB’s Holzmann Floats Tenfold Hike in Minimum Reserves
Banks are pushing back, saying the move would cut into profits and limit their ability to extend credit to the economy. Some ECB Governing Council members have come out against the idea as well, with French central bank head Francois Villeroy de Galhau saying earlier this week that “there’s no monetary justification” for the step.
A decision by the ECB to raise the reserve requirement by just 1 percentage point would shave about 4% off the pretax profit of affected banks, according to Nicolas Charnay, an analyst at S&P Global Ratings. It would also reduce the money that banks have available to meet regulatory liquidity requirements, he said at the conference on Thursday.
The ECB currently requires banks to hold 1% of specific liabilities, mainly customer deposits, at the central bank. That amounted to a total of 165 billion euros ($175 billion) in the latest period, according to the institution’s website.
The calls to raise how much cash banks need to hold at the ECB comes after the central bank decided in July to stop paying interest on that money. It had previously paid a rate that had been increasing along with the ECB’s deposit facility rate, which hit 4% in September.
Read More: ECB Scraps Interest on Reserves in $6 Billion Hit to Banks
Commerzbank will lose out on €100 million in annual revenue as a result of that ECB decision in July, Orlopp said on an investor call in August.
“Having a discussion about increasing minimum reserves without any interest payments is a very, very difficult one,” she said at the conference on Thursday. “I think it’s really harmful also for the economies.”
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