Keywords: 

The requirement to hold minimum reserves is laid down in Regulation (EU) 2021/378 of the European Central Bank.

All the terms used below are explained in Article 2 of the Regulation.

When does a reporting entity become subject to the reserve requirement?

A credit institution is subject to the reserve requirement as soon as it receives its authorisation, and branches of credit institutions and Savings and Loan Associations (SLA) are subject to it as soon as they start operations; an SLA must also have acquired an authorisation for economic activity as required by the Financial Intelligence Unit.

Instructions for submitting the minimum reserve report

Why are Estonian Savings and Loan Associations required to hold the minimum reserve?

The requirement was created when Estonia joined the euro area. The reason is that the activities of a Savings and Loan Association are similar to those of many other credit institutions. The main and permanent activity of both a credit institution and an SLA is taking in deposits from the public and granting loans on their own account under their own name.

When does the obligation to hold minimum reserves with the central bank arise?

Examples of meeting the minimum reserve requirement

The institution must start reporting the calculation of the reserve requirement from the reporting period after it has become subject to the requirement to report the minimum reserves. The requirement to report and the requirement to hold the minimum reserves at the central bank do not necessarily start applying simultaneously.

The Minimum Reserve Regulation (ECB/2021/1) states that the amount of minimum reserves that each institution is required to hold during the reserve maintenance period is calculated by applying the reserve ratio to each part of the reserve base for that period, after 100,000 euros has been deducted from the reserve requirement for each institution. This is an agreed operational limit at which the costs and effort of holding the reserves are not sufficiently aligned with the benefits, so that the reserve requirement does not have to be held and met at the central bank for amounts below 100,000 euros.

If the liabilities with maturities of up to two years of the institution multiplied by the reserve rate and with 100,000 euros deducted are above zero, the requirement to hold funds at the central bank applies. This means that the current applicable reserve rate of 1% creates the requirement to hold funds at the central bank if the liabilities with maturities of up to two years exceed 10 million euros, as 1% of 10,000,000 euros is 100,000 euros.

Table 1. Creation of the requirement to hold the minimum reserves

Amount of short-term liabilities

Permitted deduction

Reserve rate

Amount of the requirement before the deduction

Amount of the requirement after the deduction

10 000 000 €

100 000 €

1%

100 000 €

0 €

10 000 100 €

100 000 €

1%

100 001 €

1 €

15 000 000 €

100 000 €

1%

150 000 €

50 000 €

7 000 000 €

100 000 €

1%

70 000 €

0 €

1 000 000 €

100 000 €

1%

10 000 €

0 €

1 000 000 €

100 000 €

2%

20 000 €

0 €

10 000 000 €

100 000 €

2%

200 000 €

100 000 €

6 000 000 €

100 000 €

2%

120 000 €

20 000 €

Source: Based on Regulation ECB/2021/1.

If the reserve ratio requirement is changed by a decision of the Governing Council of the European Central Bank, Eesti Pank informs those who are subject to it.

The value of identifier 525 “size of the reserve requirement” in the report on the calculation of the reserve requirement is the amount of the requirement for the subject of the reserve requirement in the next reserve period. If it is greater than zero, the requirement to hold the reserve at the central bank is created.

The reserves are held in reserve maintenance periods. The reserve maintenance period is around 6-7 weeks, usually 42 or 49 days, during which the subject of the reserve requirement must hold the required reserves on their account at the central bank. The start and end dates of the reserve maintenance periods can be found on the website of the European Central Bank. The amounts calculated from the reporting must be held on an account opened at the central bank throughout the whole of the reserve maintenance period, but the requirement may be met as the average for the period.

Example: The required amount is 100 euros and the reserve maintenance period is 42 days long. On the evening of the final day of the reserve maintenance period the cumulative amount held at the central bank must equal 100 x 42 = 4200 euros. This can be achieved in three different ways:

  1. by holding the sum of 100 euros on the account every day of the reserve maintenance period
  2. by holding less money on the account on some days and more on others, so that the cumulative total of the end-of-day balances at the end of the period is 4200 euros
  3. by holding 4200 euros on the account on one day

Please note: It is extremely important to observe the start and end dates of the reserve maintenance period in order to know which day the total requirement must be held by, and from which day the new requirement starts to apply.

What has to be done if the requirement to hold reserves at the central bank arises?

To meet the reserve requirement, the subject to the requirement must open an account with Eesti Pank and keep money there to meet the reserve requirement, with interest paid if the reserve requirement is met and a fine levied if it is not.

Opening an account:

Calculating compliance with the reserve requirement until 20 November 2022

The subject of the reserve requirement uses the TARGET2-Eesti component of the Trans-European Automated Real-time Gross settlement Express Transfer system (TARGET2) to meet the reserve requirement. Institutions subject to the reserve requirement that have not joined TARGET2-Eesti must open an account at Eesti Pank (see „What has to be done if the requirement to hold reserves at the central bank arises” and sign a contract with Eesti Pank to use the reserve requirement module of TARGET2. TARGET2 can be accessed using the internet or the SWIFT data connection network. It is free to use this service.

Calculating compliance with the reserve requirement from 21 November 2022

A subject of the reserve requirement that is also a user of TARGET services uses their Main Cash Account (MCA) opened in TARGET to meet the reserve requirement.

A subject of the reserve requirement that does not use other TARGET services will also have to open an MCA account in TARGET, but they can meet the reserve requirement in two ways:

  • they can meet the reserve requirement themselves and make the necessary transfers to and from the account. In this case the subject of the requirement must organise their own access to TARGET services. TARGET services can be accessed through SIA-Colt and SWIFT
  • they can delegate the whole or part of the MCA to a co-administrator by signing a contract to do this. The co-administrator is a market participant that uses TARGET services, and that decides for themselves whether and to what extent to provide co-administrator services. If there is demand for it, Eesti Pank can consider providing the reserve requirement fulfilment service to market participants who are interested. If the whole operation is delegated, the subject of the reserve requirement does not need to have access to TARGET services

What does the amount of interest paid on the reserve requirement held at the central bank depend on, and how does it change?

Holding the required reserves is compensated at the interest rate on the main refinancing operations of the European Central Bank. This interest rate can change for each reserve maintenance period depending on the decisions of the Governing Council of the European Central Bank. The formula for calculating interest is set out in Article 9 (1) of the Minimum Reserve Regulation (ECB/2021/1). The current interest rates can be found here.

The central bank informs subjects of the reserve requirement of changes to monetary policy interest rates.

Interest is paid once for the reserve maintenance period on the second banking day after the end of the reserve maintenance period for which the interest was earned.

What is the excess reserve and how monetary policy interest rates applied to it?

The excess reserve is the amount exceeding the reserve requirement that is held on the account of the central bank. As part of the monetary policy strategy of the euro area, the interest rate on the deposit facility has been applied to excess reserves, and that rate has been negative since 2014.

This interest rate can also change for each reserve maintenance period at the decision of the Governing Council of the European Central Bank.

What is tiering?

On 12 September the Governing Council of the European Central Bank decided to introduce a two-tier system for using the interest paid on reserves, so that some of the excess liquidity that banks hold at the central bank would be exempt from the negative interest rate on the deposit facility.

The two-tier system introduced on 30 October 2019 from the seventh reserve maintenance period of 2019 for interest paid on reserves, or reserve remuneration, means that credit institutions subject to minimum reserve requirements will be exempt from the interest rate on the deposit facility if they hold up to 6 times the minimum reserve.

As the single minimum reserve requirement is remunerated at the interest rate on main refinancing operations of the European Central Bank (currently 0%), the interest exemption introduced at the end of October 2019 meant that an interest rate of zero was applied to amounts that were up to 7 times the minimum reserve of funds held by subjects of the reserve requirement at the central bank. The remainder is still subject to the interest rate on the deposit facility.

See also the Q&A on the website of the European Central Bank, with examples of the calculation and payment of the interest exemption at the end.

Eesti Pank informs subjects of changes to the two-tier system multiplier.

What happens if the reserve requirement is not met?

The European Central Bank applies sanctions to institutions that breach the obligations that come from the ECB regulation and decisions on the reserve requirement. Sanctions are applied under Regulation (EC) No 2532/98, Regulation (EC) No 2157/1999 (ECB/1999/4) and Regulation (EC) No 378/2021 (ECB/2021/1), which set out the appropriate sanctions and the procedure for applying them. For a serious breach of the minimum reserve requirements, the Eurosystem may also suspend the counterparty's participation in open market operations.

Calculation of the fine

Distinction is made between one-off and repeated failure to comply with the reserve requirement.

The fine for a one-off breach of the reserve requirement by an institution is set at 2.5 percentage points above the average interest rate on the marginal lending facility of the European System of Central Banks during the reserve maintenance period concerned. The fine is applied to the daily average amount of minimum reserves that the institution concerned failed to provide.

The formula for calculating the fine is:

  • Pt = the fine to be paid
  • Dt = the average daily amount of required reserves that were missing
  • nt = the number of calendar days in the maintenance period
  • i = calendar day
  • MLRi = the marginal lending rate on the calendar day

Repeated breaches of the requirement are when an institution that is subject to the reserve requirement breaches that requirement more than twice during a 12-month period. The sanction for each repeated breach is calculated using the same formula but instead of 2.5 percentage points, the rate of 5.0 percentage points is applied.

Procedures for sanctions and the right to reply

The procedure in detail (ECB/ 1999/4 article 11).

  1. The national central bank informs the institution of the alleged breach of the requirements and the sanction on behalf of the Executive Board of the ECB before the sanctions are applied. The notification sets out all the facts relating to the alleged breach of the requirement and informs the institution that if it does not object, the sanction will be understood to have been applied by decision of the Executive Board of the ECB.

The process is initiated by Eesti Pank sending a letter containing the facts of the breach of the reserve requirement and the application of the fine to the institution that has breached the requirement. The letter is sent by Eesti Pank by email and is signed digitally.

  1. After receiving the notification, the institution has five working days to
    1) acknowledge in writing the alleged breach and agree to pay the fine that applies for it, in which case the proceedings are closed for that case; or
    2) submit written information, explanations or arguments that could affect the decision to apply the fine. The institution may supply additional documents to back up the facts submitted in its response. The national central bank forwards any document submitted to it to the Executive Board of the ECB, which takes the decision on whether to apply the sanction.

The Governing Council may request additional information from the institution concerned, the Executive Board of the ECB or the national central bank in order to review the decision of the Executive Board of the ECB. The Governing Council sets a deadline for receiving the information, which must allow at least five working days.

  1. If the institution does not submit any written objections within the deadline allowed, the sanction is understood to have been applied by the decision of the Executive Board of the ECB. Once the decision is final, the amount stated in the notification of the fine is taken from the institution.
  2. If the institution acknowledges the breach of the reserve requirement and agrees to the sanction, or if it has not objected in writing within the time allowed, the sanction is understood to have been applied and the ECB or the national central bank informs the supervisory authorities concerned in writing of the sanction applied to the institution.

Responses to letters from Eesti Pank may be sent to the email address kohreserv [at] eestipank.ee.

Requirement to declare encumbered assets

The funds that the subject of the reserve requirement uses to meet the requirement must meet the basic principle that they are free of all restrictions and are available for immediate use. Beyond meeting the reserve requirement, these funds may only be used for making payments. Funds that do not meet all the requirements cannot be used for fulfilling the reserve requirement, and the new wording of the regulation that comes into force on 28 July 2021 will require the subject of the reserve requirement to inform the central bank of the funds held at the central bank that are encumbered.

Encumbered funds are those that are subject to any legal, contractual, regulatory or other restrictions[1] that would prevent the institution from liquidating, transferring, assigning or disposing of such funds during the maintenance period, shall be excluded from the reserve holdings. This means that encumbered funds cannot be used for meeting the reserve requirement and must be replaced by eligible funds. For more information see Article 3 (d) of (EU) 2021/378.

Once the institution has notified the central bank of the encumbered funds, the central bank sends the institution an application form for opening a new account, opens the account upon application and transfers to it the encumbered funds that were previously counted for the reserve requirement, to which the interest rate on the deposit facility applies in full.

Information on the existence or emergence of encumbered funds should be sent by email to kohreserv [at] eestipank.ee .

Holding the reserve requirement through an intermediary

A credit institution or other subject of the reserve requirement may apply to the central bank for authorisation to hold its minimum reserve indirectly through an intermediary (EU) 2021/378 Article 10.

For this the intermediary must:

  1. be a resident of the same member state
  2. be subject to the reserve requirements
  3. also carry out administrative tasks other than holding the minimum reserve for that institution, such as asset management

A subject of the reserve requirement that wants to apply to Eesti Pank for authorisation for an intermediary to hold its minimum reserve must meet all the conditions in the regulation of having a contract with the intermediary that gives information on whether the applicant wants access to the standing facilities of the Eurosystem and to open market operations, without it limiting the application of the terms of article 10 (7) of the Minimum Reserve Regulation ECB/2021/1.

Eesti Pank must be informed of this a minimum of 12 months in advance. Digitally signed applications can be sent by email to kohreserv [at] eestipank.ee .

If a banking group has applied to hold the minimum reserve of a member of the group through an intermediary and the central bank has accepted that application, the parent company of the banking group may apply to the central bank for authorisation to submit reports on the minimum reserve at the group level (see Article 6 (2) of ECB Regulation 2021/379). Once this authorisation has been granted by the central bank, a one-off operational limit of 100,000 euros is deducted from the total reserve requirement of all entities combined.

Digitally signed applications should be sent by email to kohreserv [at] eestipank.ee .

In what cases can exemption be granted from the reserve requirement?

An institution can be exempted from the reserve requirement without needing to apply from the beginning of the maintenance period during which its permissions are revoked or it surrenders those permissions, or during which a court or other authority of a Eurosystem Member State decides to open winding-up proceedings against the institution (see Directive 2001/24/EC and Article 4 (1) of ECB Regulation ECB/2021/1).

For Savings and Loan Associations, Eesti Pank bases the exemption from the reserve requirement without application needing to be submitted on whether there is an authorisation for economic activity granted from the Financial Intelligence Unit.

Eesti Pank implements the exemption if it comes directly from the regulation, and informs the institution and the European Central Bank of this in writing.

An institution may also be released from the reserve requirement either at its own request or at the request of the central bank in the following cases:

  • the institution is subject to reorganisation measures under Directive 2001/24/EC
  • the institution is the subject of a freezing order from the monetary union or a member state or the monetary union has imposed measures that restrict the institution's ability to use its own funds
  • the Eurosystem has suspended or excluded the institution's access to its open operations or standing facilities under European Central Bank Guideline (EU) 2015/510 (ECB/2014/60); this does not apply to SLAs
  • it is not appropriate to subject the institution to the reserve requirement

The decision to release the reserve requirement either temporarily or permanently is then taken by the Governing Council. The institution is informed of the decision to release the reserve requirement by the relevant national central bank.

[1] Including means which are freely available but which, by the institution's own decision, are intended to fulfill another purpose or obligation.