Euro area banks are required to hold a certain amount of funds, known as minimum reserves, in their accounts at their national central bank. A bank's minimum reserve requirement is set for six-week periods called maintenance periods. The level of reserves is calculated on the basis of the bank’s balance sheet prior to the start of the maintenance period, by applying a percentage (known as the reserve ratio) to certain balance sheet items (known as the reserve base).
Banks have to make sure that they meet the minimum reserve requirement on average over the maintenance period. Consequently, they do not have to hold the total sum in their current accounts at the central bank on a daily basis. This functions like a valve, allowing banks to react to short-term changes in the money markets, where banks lend to each other, by adding or withdrawing funds from their reserves at the central bank. This helps to stabilise the interest rate banks charge each other for short-term funds.
At the end of the maintenance period, the central bank pays to the banks an interest on their minimum reserve holdings. The interest rate applied is equivalent to the main refinancing operation rate prevailing during the maintenance period. Moreover, a two-tier system (TTS) for remunerating excess reserves (reserves held by banks in excess of minimum reserve requirements) has been applied since 30 October 2019.
Reserve requirements are a standard monetary policy tool for central banks in the euro area. However, some central banks do not have them, for example those in Australia, Canada and Sweden.