The European Central Bank (ECB) requires credit institutions to hold compulsory deposits on accounts with the national central banks (NCBs): these are called "minimum" or "required" reserves. The amount of required reserves to be held by each institution is determined by its reserve base.
In order to determine an institution's reserve requirement, the reserve base is multiplied by the reserve ratio. The ECB applies a uniform positive reserve ratio to most of the balance sheet items included in the reserve base. This reserve ratio was set at 2% at the start of Stage Three of European Economic and Monetary Union (EMU) and is lowered to 1% from 18 January 2012. As noted above, the reserve requirement for each individual institution is calculated by applying the reserve ratio to the reserve base. Institutions have to deduct a uniform lump-sum allowance of 100,000 € from their reserve requirement. This allowance is designed to reduce the administrative costs arising from managing very small reserve requirements.
In order to meet their reserve requirements, credit institutions have to hold balances on their current accounts with the NCBs. This means that compliance with minimum reserve requirements is determined on the basis of the average daily balances on the counterparties' reserve accounts over one reserve maintenance period.
The Eurosystem aims to ensure that the minimum reserve system neither puts a burden on the banking system in the euro area nor hinders the efficient allocation of resources. For this reason, credit institutions' holdings of required reserves are remunerated. The remuneration corresponds to the marginal rate (weighted according to the number of calendar days) of the main refinancing operations during the reserve maintenance period. This rate is therefore very close to the short-term money market rates.
The key functions of the minimum reserve system are to stabilise money market interest rates and to enlarge the structural liquidity shortage of the banking system (Source: The Monetary Policy of the ECB. European Central Bank, Frankfurt 2004).
Data on the amount of required minimum reserves and their fulfilment are published on page *42 of the statistical section of the Monthly Report of the Deutsche Bundesbank.