To cut costs, the Czech National Bank has decided to stop charging banks for their mandatory reserves, which they are required by law to deposit with the central bank. This decision will result in banks losing billions of koruna annually, with customers likely to bear the brunt of the shortfall.
According to Michal Skořepa, an economist at Česká spořitelna, “The banking sector will lose 700 million koruna in interest income per month due to the lack of interest on reserves.” Currently, the central bank’s key rate stands at seven percent annually, and the volume of mandatory reserves is nearing 120 billion koruna.
According to analysts, to compensate for this loss, banks may subtly reduce interest rates on deposits and possibly even increase rates on loans. However, increasing the base interest rate would be ideal for them as it would help cover the lost income. Yet, the Czech National Bank currently has no plans to raise rates.
Analysts Radim Dohnal from Capitalinked.com and Tomáš Pfeiler from Cyrrus estimate that banks may only need to decrease deposit interest rates by 0.3 percentage points. However, Skořepa believes that it would require more significant adjustments. He suggests that if banks were to compensate for the loss solely through increased loan rates, those rates would need to rise by approximately 0.2 percentage points. Alternatively, a roughly 0.15 percentage points reduction would be necessary if the compensation were made through deposit rates.
When approached for comment, banks declined to offer their opinions, stating that they cannot comment until the results are published. However, Česká spořitelna alone would lose over a billion koruna in annual income due to the cessation of reserve interest. Their clients’ deposits amount to around 1.4 trillion koruna, with mandatory reserves of 28 billion koruna at a two percent rate. With the previous interest rate set at four percent by the Czech National Bank, the cessation represents a loss of approximately one billion koruna. The current interest rate, however, stands at seven percent.
Komerční banka has already announced a significant impact on its financial performance. The prescribed level of minimum reserves for the current maintenance period, from September 7th to October 4th, amounts to 19.6 billion koruna for the Komerční banka and Modrá pyramid. “The elimination of interest on mandatory deposits will reduce the group’s interest income by approximately 115 million koruna per month compared to the current interest rate of seven percent,” stated Komerční banka.
This would result in an estimated loss of approximately 1.38 billion koruna per year at the current interest rate. However, Karel Nedvěd, an analyst at Fio banka, reassures that “although the elimination of reserve interest will impact the banks’ net interest income, we do not expect it to be significant. The impact on an annual basis should be in the range of a few percent.”