Opinion of the European Central Bank of 11 August 2010 on reserve requirements for credit institutions (CON/2010/68)
Date: 2010-08-11
Institutions: European Central Bank
Subjects: Hungary, credit institution, foreign-exchange reserves, monetary policy, national law

EN 

OPINION OF THE EUROPEAN CENTRAL BANK 

of 11 August 2010 

on reserve requirements for credit institutions 

(CON/2010/68) 

Introduction and legal basis 

On 20 July 2010 the European Central Bank (ECB) received a request from the Magyar Nemzeti Bank 

(MNB) for an opinion on a draft decree on reserve requirements (hereinafter the ‘draft decree’).  

The ECB’s competence to deliver an opinion is based on Articles 127(4) and 282(5) of the Treaty on the 

Functioning of the European Union and Article 2(2) of Council Decision 98/415/EC of 29 June 1998 on 

the  consultation  of  the  European  Central  Bank  by  national  authorities  regarding  draft  legislative 
provisions1,  as  the  draft  decree  relates  to  instruments  of  monetary  policy  of  a  Member  State  whose 

currency is not the euro. In accordance with the first sentence of Article 17.5 of the Rules of Procedure of 

the European Central Bank, the Governing Council has adopted this opinion. 

1. 

Purpose of the draft decree 

1.1  According to the explanatory memorandum attached to the consultation request, in November 2008 

the MNB reduced the minimum reserve ratio in a single step from 5 %, the reserve ratio which had 

been in effect from 2002, to 2 %, which is the reserve ratio currently applying to the Eurosystem. 

This was done in response to the confidence crisis affecting the Hungarian interbank market. The 

reduction of the reserve ratio was prompted mainly by liquidity shortages experienced by a number 

of large Hungarian banks due to their foreign exchange exposures. It also contributed significantly 

to the increase in these credit institutions’ surplus HUF liquidity, thereby mitigating the risks to the 

stability  of  the  banking  sector.  However,  the  lower  reserve  requirement  posed  a  challenge  for  a 

number of smaller banks in the Hungarian market in coping with large fluctuations in their liquidity 

needs.  This  problem  has  been  exacerbated  by  the  fact  that  the  interbank  market  is  still  weak 

compared to the period before the crisis in 2008, due to, inter alia, risk aversion.  

1.2   Pursuant to Decree 15/2008 (XI.24.) of the Governor of the MNB on the reserve requirement ratio, 

the current reserve ratio applicable to Hungarian credit institutions subject to reserve requirements 

is  2 %.  The  purpose  of  the  draft  decree  is  to  enable  credit  institutions  subject  to  reserve 

1  

OJ L 189, 3.7.1998, p. 42.  

 
 
 
 
                                                 
requirements to choose from one of the following reserve ratios: 2 %, 3 %, 4 % or 5 %. The draft 

decree will enter into force upon approval by the MNB’s Monetary Council. 

2. 

General observations  

2.1  Experience  from  the  recent  crisis  has  shown  the  importance  of  the  buffering  function  played  by 

reserves  held  at  the  central  bank.  This  may  imply  that  it  is  beneficial  for  some  banks  to  have  a 

reserve  ratio  that  is  not  too  low.  In  this  context,  the  ECB  understands  the  MNB’s  approach  of 

transferring the responsibility for determining the reserve ratio to the banking system. At the same 

time, incentives encouraging credit institutions to have active liquidity management are needed to 

ensure  a  dynamic  and  efficient  interbank  market.  In  this  regard,  a  continual  and  long-term 

monitoring  of  the  possible  impacts  of  the  measures  introduced  by  the  draft  decree  on  the 

functioning  of  the  Hungarian  interbank  market  is  recommended.  Similarly,  alternative  ways  of 

reducing the size and frequency of liquidity shocks should be considered. It could also be beneficial 

to address the sources of the liquidity shocks that led the MNB to introduce the draft decree.  

2.2  More specifically, the difficulties some Hungarian banks had in coping with large shocks in their 

liquidity demand, e.g. due to large transactions from their clients, appear to be a key reason behind 

the  significant  accumulation  of  overnight  deposits.  In  the  short  term  and  during  the  convergence 

process  towards  joining  the  euro  area,  the  MNB  may  need  greater  flexibility  to  address  liquidity 

shocks  and  market  inefficiencies  which  hinder  the  implementation  of  national  monetary  policy. 

Member States whose currency is not the euro retain their powers in the field of monetary policy. 

However, in the implementation of the single monetary policy, consistency with the Eurosystem’s 

operational framework at an early stage will be required. Credit institutions in such Member States 

will need to be familiar with requirements that will apply to them when the euro is introduced, such 

as the single reserve ratio of 2 %. 

3. 

Specific observations  

Upon adoption of the euro in Hungary, the ECB’s minimum reserves framework will apply, in particular. 

(a) Article 19 of the Statute of the European System of Central Banks and of the European Central Bank; 

(b) Council Regulation (EC) No 2531/98 of 23 November 1998 concerning the application of minimum 
reserves  by  the  European  Central  Bank2;  (c)  Regulation  ECB/2003/9  of  12  September  2003  on  the 
application of minimum reserves3; and (d) in relation to the definition and calculation of the reserve base, 

Regulation  ECB/2008/32 of  19  December  2008  concerning  the  balance  sheet  of  the  monetary  financial 
institutions  sector  (recast)4.  Article  11  of  and  Annex  III  to  Regulation  ECB/2008/32  requires  statistical 

information reported by credit institutions under Regulation ECB/2008/32 to be used for the purpose of 

2  
3  
4 

OJ L 318, 27.11.1998, p. 1. 
OJ L 250, 2.10.2003, p. 10. 
OJ L 15, 20.1.2009, p. 14. 

2 

 
 
                                                 
 
minimum  reserves.  Special  rules  set  out  in  this  Regulation  prevail  over  Regulation  ECB/2003/9  and 

concern small credit institutions, group reporting and reserve requirements in the case of mergers. 

This opinion will be published on the ECB’s website two months after the date of its adoption. 

Done at Frankfurt am Main, 11 August 2010. 

[signed] 

The Vice-President of the ECB 

Vítor CONSTÂNCIO 

3