The European Central Bank is advising eurozone banks to adjust to a leaner liquidity environment by embracing its standard refinancing tools as a routine part of financial management.
From Overflow to Optimization
For more than a decade, eurozone banks have operated with an abundance of liquidity. Thanks to policies like asset purchase programs and TLTROs (targeted longer-term refinancing operations), banks didn’t need to think twice about reserve shortages.
But that era is ending.
At its peak in November 2022, excess liquidity reached a staggering €4.7 trillion—around 14% of banks’ total assets. By early 2025, that figure had dropped to €2.8 trillion and continues to shrink. As the ECB scales back its balance sheet, banks must adapt to tighter conditions.
ECB’s Message: Make Refinancing Routine
To help manage this transition, the ECB wants banks to start using central bank refinancing operations—like the weekly MROs (Main Refinancing Operations) and the three-month LTROs (Longer-Term Refinancing Operations)—as part of their regular playbook.
This isn’t about emergency borrowing anymore. It’s about normal liquidity management.
“Banks need to ensure that they are operationally ready for the change in how central bank reserves are provided.”
“In the new normal, standard refinancing operations are seen as a routine and integral component of banks’ day-to-day liquidity management.”
These comments from ECB Executive Board Member Isabel Schnabel and ECB Supervisory Board Chair Claudia Buch underscore a cultural shift: borrowing from the ECB should no longer be seen as a red flag but as a practical tool.
Clearing the Stigma Around Central Bank Cash
One of the challenges the ECB is addressing is the perceived stigma of tapping into its refinancing operations. Even when these tools are readily available, many banks hesitate, worrying it signals weakness.
But the ECB wants to reframe this thinking. With less free cash floating in the system, central bank support will be necessary—and perfectly normal.
To support this change, the ECB is encouraging banks to upgrade their IT systems and ensure staff are trained to manage and mobilize collateral effectively.
A New Operational Framework for a New Era
The ECB isn’t just asking banks to change; it’s making structural changes too.
In March 2024, the Governing Council introduced a refreshed liquidity framework:
- Standard refinancing operations will be available on demand at fixed rates.
- A narrow 15-basis-point spread between the MRO and deposit rates will keep money markets stable.
- Structural LTROs and a bond portfolio will help manage long-term liquidity needs.
A broader review of the framework is planned for 2026, but these adjustments are already laying the groundwork for a post-abundance financial system.
What This Means for the Future
The ECB’s message is clear: the eurozone is shifting from liquidity overflow to liquidity management. Banks need to build resilience—not just in capital—but in operations, systems, and mindset.
In a world where excess cash can no longer be taken for granted, routine engagement with the ECB will be key to maintaining financial stability.
