The European Central Bank is urging banks to test regular lending offers as quantitative tightening reduces excess liquidity in the financial system. A new blog post from ECB economists highlights that banks representing a quarter of euro-area assets now operate near their preferred reserve levels, up from 15% a year ago. This share is expected to reach 50% by year-end.

After years of crisis-fighting measures that swelled excess liquidity to €4.7 trillion in late 2022, the ECB is transitioning to a regime where reserves align with banks' actual needs. While participation in standard weekly and three-month operations remains low, the number of bidders has gradually increased. Executive Board member Isabel Schnabel has been encouraging banks to use these offers routinely.

The economists also found that reserves redistribute smoothly across banks and euro-area countries without fragmentation. Banks closest to their preferred reserve levels borrow most heavily in short-term repo markets. With the ECB set to review its operational framework later this year, policymakers envision refinancing operations and a structural asset portfolio to help meet future liquidity demands.