Reserve ratio is used to stabilise short-term money market interest rates and create (or change) a structural liquidity shortage, thereby also influencing the credit institutions' demand for the central bank money.
The Eurosystem's minimum reserve system primarily pursues monetary functions: stabilisation of the money market interest rates and enlarging a structural liquidity shortage. According to the ECB regulation, all credit institutions are required to hold a certain amount of minimum reserves with their national central banks. The credit institutions' holdings of required reserves are remunerated at the rate of the Eurosystem's main refinancing operations.
Euro area credit institutions are required to hold liquidity in the amount of 1% of their collected non-bank deposits with their national central banks. Normally, credit institutions also hold a small amount of excess reserves with their central banks, which may grow significantly in periods of financial market tensions.
Minimum reserves are one of the instruments of ECB operational framework for monetary policy, which is designed primarily to stabilize money market interest rates and to create or enlarge structural liquidity shortage.
ECB requires all credit institutions and credit unions established in the euro area to hold compulsory minimum reserves on accounts with the National Central banks (NCBs).
The reserve requirement of each individual institution is calculated by applying the corresponding ECB reserve ratio to the amount of deposits and other liabilities, included in the reserve base.
Credit institution or credit union fulfils reserve requirements if the average end-of-day balance on its reserve account with the NCB is not less than reserve requirement for the given reserve maintenance period.
The remuneration of the minimum reserve holdings is calculated, using the Eurosystem marginal rate of the main refinancing operations for the given period.
In case of non-compliance, NCB imposes penalty, which is calculated using the marginal lending facility rate of the Eurosystem and the daily average amount of the non-compliance.