Next month, the Czech National Bank will end interest on deposits that banks must deposit with it as mandatory minimum reserves. This is definitely not a small amount, on average, banks held over 100 billion crowns with the CNB this year, and it will hurt the banks a lot.
With this decision, the Central Bank follows on from a similar move by the European Central Bank from this July.
“The Czech National Bank took this step with the aim of reducing the costs of implementing monetary policy while maintaining its effectiveness,” CNB spokeswoman Petra Krmelová said in a press release. Mandatory minimum reserves must be deposited with the CNB by banks, branches of foreign banks and credit unions.
What are mandatory minimum reserves?
Banks are obliged to maintain a certain part of their funds as reserves in an account with the CNB. Since the end of 1999, it has been two percent. These reserves are intended as a measure of the central bank for the regulation and control of money circulation and liquidity in the economy.
However, the CNB pointed out that mandatory minimum reserves have not been a de facto instrument of the central bank’s monetary policy for a long time. The latter considers this reserve more as a tool for ensuring sufficient liquidity in the banking system, so that it is possible to ensure the smooth flow of payments between banks.
100 million per month
Komerční banka has already responded to the CNB’s decision, stating in a statement on Friday that it expects significant impacts on its economy. “The set amount of mandatory minimum reserves for the current maintenance period (September 7 to October 4, 2023) is approximately 19.6 billion crowns. The abolition of interest on these mandatory deposits thus represents a reduction in the KB Group’s interest income by approximately 115 million crowns per month, compared to the current interest rate of a two-week repo rate of seven percent,” Komerční banka calculates.
Moneta Money Bank then estimates that its interest income will decrease by 120 million crowns this year and by approximately 450 million crowns in 2024.
“Although the abolition of interest on mandatory minimum reserves will have an impact on banks’ net interest income, we do not expect it to be too significant. We estimate that on an annual basis there should be a negative impact on banks’ net interest income in the order of one percent,” said Fio bank’s analyst Karel Nedvěd.
The chief economist of the Czech Banking Association, Jakub Seidler, noted on his account on the X network that this year’s average size of mandatory minimum reserves is 115 billion crowns. “By abolishing interest, the CNB would reduce its interest payments by eight billion for the whole year, for this year it will be two billion,” he wrote.
“We evaluate the information slightly negatively for the shares of Komerční banka and Moneta due to the negative impact of this step on the banks’ interest income. We estimate the potential impact on the annual net interest income to be three percent, considering the ongoing seven percent interest rates. A probable reduction in interest rates by the CNB in the one-year horizon would nevertheless reduce the theoretical impact on net interest income,” added analyst Thomas Unger from Erste Bank Group.
Shares of banks traded on the Prague Stock Exchange reacted to the CNB’s move by sharply weakening. Shortly after 3 p.m., Komerční banka’s shares depreciated by up to four percent below CZK 670 per piece, later erasing some of the losses. The shares of Moneta and Erste Group, which includes Česká spořitelna, also developed unfavorably. Both titles lost around two percent.
2023-09-08 15:30:55
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