In a cost-cutting move, the Czech National Bank has made the decision to cease charging banks for their mandatory reserves, which are legally required to be deposited with the central bank. While this decision may help reduce expenses for banks, it is expected to have a substantial impact on their annual income, potentially leading to consequences for customers.

Under the current framework, banks stand to lose billions of koruna annually due to the absence of interest income on these reserves. As per 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.” At present, the central bank’s key rate stands at seven percent annually, and the total volume of mandatory reserves is approaching 120 billion koruna.

To offset this substantial loss, banks may consider subtle adjustments such as reducing interest rates on deposits and possibly even increasing rates on loans. However, the most ideal solution for them would be an increase in the base interest rate, which could help compensate for the lost income. Nevertheless, the Czech National Bank does not currently have plans to raise rates.

Analysts, including Radim Dohnal from Capitalinked.com and Tomáš Pfeiler from Cyrrus, estimate that banks might need to decrease deposit interest rates by approximately 0.3 percentage points. However, Skořepa believes that more substantial adjustments may be necessary. 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 reduction of roughly 0.15 percentage points might be required if the compensation were made through deposit rates.

When approached for comment, banks declined to offer their opinions, citing the need to wait until the results are published. However, Česká spořitelna alone stands to lose over a billion koruna in annual income due to the cessation of reserve interest. With their clients’ deposits amounting to around 1.4 trillion koruna and mandatory reserves of 28 billion koruna at a two percent rate, the cessation represents a significant loss. The previous interest rate was set at four percent by the Czech National Bank, but the current rate is seven percent.

Komerční banka has already announced a significant impact on its financial performance. The elimination of interest on mandatory deposits is expected to reduce the group’s interest income by approximately 115 million koruna per month compared to the current interest rate of seven percent, resulting in an estimated annual loss of around 1.38 billion koruna at the current interest rate. Analysts like Karel Nedvěd from Fio banka suggest that while the elimination of reserve interest will affect banks’ net interest income, the overall impact on an annual basis is not expected to be significant, likely falling within the range of a few percent.

Article by Prague Forum