Implications of reducing the Eurosystem's excess reserves

Austrian Science Fund

Recent estimates suggest that international reserve holdings of the eurosystem could be reduced to half of its existing level as a result of the introduction of the euro. There is, however, little or no consensus about the best way to run down these excessive reserve holdings; actually, there are hardly studies trying to answer this question.


This study shall help to close this gap in the literature. Potential (gross) welfare gains have to be balanced against a reduction in the yield earned on reserves on one hand and against potential threats for price- and exchange rate stability on the other hand. The latter aspects also matter from a legal point of view, as certain reserve transactions (like significant reductions) by the national central banks (NCBs) require the approval of the European Central Bank (ECB), which may be refused in case of their inconsistency with the exchange rate and the monetary policies of the Community. Generally, economic and legal aspects of the research project are interrelated to a large extent, requiring an interdisciplinary approach in pursuing the following main goals:

• to provide a systematic overview of the proposed alternatives to use excessive reserve holdings and an analysis of the problems involved in allocating excessive reserves

• based on existing estimates of the size of excess reserves, to analyse the economic implications of alternative reserve uses

• to analyse the legal framework and the distribution of powers between the various actors (ECB, NCBs, governments) on the European and national level

• to discuss the consistency of the proposed alternatives with the legal framework and potential legal conflict settlement procedures between the ECB and the national governments