Sharing Central Banks’ costs and profits of monetary policy in the euro area

By Sergio Cesaratto

A debate has developed in Europe (on Vox.eu and elsewhere) on the fiscal costs related to the interest payments that central banks in the eurozone are bestowing on commercial banks, a result of the way monetary policy is currently conducted. The implementation of monetary policy currently revolves around the ECB’s direct control of the interest rate paid on an abundant excess of bank reserves (relative to mandatory reserve requirements) (see Cesaratto 2020, chapter 7). This excess is the result of past quantitative easing (QE) operations whereby the eurozone’s national central banks (NCBs) bought government and corporate bonds by issuing reserves (liquidity). At the ECB’s current target rate of 3.75 per cent, banks are collecting considerable sums, more than 118 billion per year rebus sic stantibus. This also happens in other monetary areas, but there are European peculiarities.

Read rest here.