Commentary Directory
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- A Strong March Leads to a Surge in Chinese GDP in Q1 2023
- Durable Goods Retail Sales Suffer from High Interest Rates and Wary Consumers
- Choppy GDP Means UK Should Avoid Q1 Recession
- Japanese Consumer Confidence Jumps to Highest Level in Over a Year
- The End of Summer Sees the End of Disinflation in Europe
- Labor Market Indicators are Starting to Unify on Easing in Hiring
- Inflation and Tight Financial Conditions Weigh on the German Consumer
- Euro Area Money Supply Contracts for the First Time Since 2010
- Dismal Economic Data Out of Germany
- Core Durable Goods New Orders See Gentle Uptrend in July
- More UK Data Pointing to Q3 Decline
- Whispers of a UK Contraction in Q3
- Japan's Core Inflation Resumes Uptrend in July
- Early July Economic Data Leads to a Sharp Increase in Q3 Growth Expectations
- UK CPI: Energy Inflation Crashes but Services Inflation is Still Sticky
- China's Weak Start to Q3 Means More PBoC Easing
- A Breather for the Eurozone as Inflation Hits Two-Year Low
- Germany's September CPI Report: A Clearer Picture of Inflation Trends
- US Manufacturing Demonstrates Resilience Amidst Volatility in August
- The ECB Prepares to Address Excess Liquidity Through the MRR
- Bank of Japan is Too Optimistic on Inflation
- The Bank of England Pauses in a Near Split Decision
- UK Inflation August Update: A Precursor to the Bank of England's Announcement
- Housing Starts Tumble in August Amid Rising Mortgage Rates
- US Retail Sales Grow at Fastest Monthly Rate Since the Start of the Year
- US Consumer Prices Surge in August Driven by Energy Costs
- August NFIB Survey Showed a Tough Environment for Small Businesses
- All Signs Point to a Weaker Labor Market in August
- Chinese CPI Trying to Buck the Deflation Trend
- Energy Prices Rise but the Core Disinflationary Trend is Maintained in September
- PPI's Quiet Rise and the Energy Elephant in the Room
- Small Businesses Grapple with Inflation and Financial Strain in September
- A Wacky September Jobs Report Shows Strong Labor Market
- A Look at the Fragile US Labor Market Ahead of the Nonfarm Payrolls Report
- Thoughts on GME and This Week in the Stock Market
- Record Home Price Levels Point to Strength in Post-Pandemic Economy
- The Stock Market Looks Overvalued, but It's Probably Not
- China GDP Growth Surpasses Expectations
- President-elect Joe Biden Introduces His "American Rescue Plan"
- Political Polarization Intensifies with Another Impeachment Along Party Lines
- Metal Demand Has a Bright Future in 2021 and Beyond
- What Happened to That US-China Trade Dispute?
- Civil Unrest, A Rising Threat to the 2021 Economy
- What's in the $900 Billion Relief Plan?
The ECB Prepares to Address Excess Liquidity Through the MRR
Jacob Hess
September 26, 2023
- Euro Area
- Monetary Policy
The European Central Bank (ECB) is actively exploring methods to curtail the excess liquidity within the euro area banking system. Among the strategies under consideration is a potential adjustment to the minimum reserve requirements ratio (MRR). Such an adjustment could see the MRR rise from its current 1% to either 3% or 4%. In monetary terms, this translates to an escalation in capital requirements from €165 billion to a staggering €500 billion or even €600 billion. A move of this magnitude would exert considerable pressure on bank profitability, primarily because it would limit the volume of funds on which banks can accrue interest within the ECB's deposit facility.
As the potential for this change in capital requirements is discussed by the media and analysts, ECB President Lagarde addressed the issue of excess liquidity in her speech in front of the Committee on Economic and Monetary Affairs of the European Parliament. She points out that a lot of excess liquidity has already been drained out of the economy (about €1 trillion) over the past year through the repayments of TLTRO III and the drawdown in securities held under the asset purchase programme (APP). She also shares that the “Eurosystem staff is analysing the optimal long-run size and composition of our balance sheet – and by implication, the adequate level of excess liquidity” which is likely a nod to the suspicions that the MRR is in the ECB’s target. The message seems clear here that there will be a general effort by the ECB to address excess liquidity concerns in the near future. She asserts that “this is not a trivial issue as it has implications for the way we implement monetary policy.”
A more general concern about an MRR hike is that the banking sector may be too fragile to just absorb the damage. As we saw during the banking crises earlier this year, balance sheets were quite vulnerable to major shifts in rates and liquidity that hadn’t been seen in decades. An overreaction by financial institutions to the further withdrawal of excess liquidity could accelerate a hard landing into a panic and a crash. Thus, it is crucial that the ECB walk a fine line here. Communication of potential policy changes has always been key, and it explains why three ECB officials have made speeches in the last two days including Lagarde’s direct mention of “excess liquidity.”
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