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How the ECB’s ‘deposit facility’ subsidises banks

David Hollanders 19th September 2023

Banks profit from the European Central Bank´s interest-rate policy at the expense of taxpayers.

ECB,European Central Bank,deposit facility
Towering above the citizen: Deutsche Bank‘s German headquarters in Frankfurt (Datenschutz-Stockfoto/shutterstock.com)

European banks are making large profits this year. The sector is concentrated and non-competitive, so while banks charge higher interest rates to borrowers they do not pass on rate increases to deposit-holders. Moreover, banks profit from the higher interest they themselves receive when depositing their money with national central banks.

With this somewhat arcane ‘deposit facility’, states are effectively subsidising banks. The subsidy is a direct result of the policy of the European Central Bank, which sets the interest rate for the facility—national central banks in the eurozone transfer €145 billion annually to commercial banks in this way. The scale and structural nature of these transfers warrant a public debate, in which central bankers would have to explain themselves.

Second privilege

Banks have the prerogative to borrow from the ECB; member-states and citizens do not. The ECB started raising the rate at which banks borrow in July 2022. This headline interest rate, as of last Thursday, is 4.5 per cent. The interest-rate increases—this was the tenth—are purportedly to curb inflation.

Whether these rate increases are indeed the best, or even an effective, measure against inflation, is widely discussed. Less attention, however, has been paid to another ECB rate increase.

Banks do not only borrow from the ECB—they also lend to it. They may deposit money at national central banks in the deposit facility. The ECB, however, sets the interest rate the commercial banks receive. The ECB has also increased this rate since the summer of 2022 and it is currently 4 per cent. This constitutes a second privilege for banks: states and citizens are not allowed to lend to central banks and miss out on the attractive interest rate.

Several questions

This raises several questions. How large are the transfers? Are they inevitable? Who ultimately pays for them? And why offer a deposit with interest to banks in the first place?



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The first question is straightforward. Banks hold €3,639 billion on their Eurosystem-accounts; 4 per cent of that is €145 billion. This constitutes the transfer on an annual basis. It is more than 1 per cent of eurozone gross domestic product and two-and-a-half times all EU agricultural subsidies.

Banks have so much money to deposit not through prudent banking but due to ECB policies. In 2015 the ECB embarked on ‘quantitative easing’ (QE), engaging with national central banks in buying bonds in purchase programmes, the most recent being that related to the pandemic. The counter-parties of these large-scale purchases are banks. In 2015 they had only €235 billion on their deposits; now they hold €3.6 trillion as a consequence of QE.

With so much digital cash, banks hardly need to borrow from the ECB. Instead they have ample money to deposit, with which they collect interest payments from national central banks.

Payments avoidable

The payments to banks such as Deutsche Bank, BNP Paribas and Santander are not unavoidable—and not only in the general sense that ultimately every policy is a political decision and can as such be altered. The payments are also avoidable specifically.

In 2019, commercial banks holding money in the deposit facility were ‘exempted’ from interest payments. Without a doubt, the reason was that the deposit-facility interest rate was negative that year. The exemption was lifted when the interest rate turned positive. If banks could be exempted in 2019 from making negative interest payments, they can be exempted in 2023 from receiving positive ones.

Withholding the de facto subsidies is called for because eurozone member states, and so taxpayers, ultimately bear the brunt. National central banks make losses due to the payments made to private banks. The Bundesbank made a loss of €172 million in 2022, while the Dutch central bank reported a loss of €460 million. Losses will be much higher in 2023; the Dutch central bank expects losses until 2028.

The losses are borne by the shareholders of national central banks, who see their dividends dry up. And the shareholders of central banks in the euro area are the member states, who now forgo the dividends they receive in regular years. Interest payments on the deposit facility are thus indirect gifts from states to banks. As the economist Paul De Grauwe tweeted in July, ‘Banks continue to enjoy massive transfers at the expense of taxpayers.’

Flawed reasoning

Why then is there a deposit facility in the first place? The ECB claims that it plays ‘an important role in steering interest rates’, as it ‘anchors short-term wholesale money market rates’.

If, for instance, Deutsche Bank were to offer an interest rate of 2 per cent to deposit-holders, competition supposedly would induce BNP Paribas to offer a higher rate to lure customers, say 2.5 per cent. It would gain market share—and could subsequently deposit the money of its new clients at the deposit facility, receiving 4 per cent itself. Competition between banks should thus ensure that the interest rate charged to deposit-holders is close to the deposit-facility rate.

There is an obvious flaw in this reasoning. There is hardly any competition in the sector, banks do not pass on rate increases to deposit-holders and the rate is thus not ‘anchored’ by the deposit facility.

It however underlies one of the few utterances from the ECB on the matter. In a letter in June to the European Parliament, the bank president, Christine Lagarde, wrote that ‘the interest income that commercial banks are currently receiving on their reserves is a side effect of the higher policy interest rates needed to achieve price stability’. If indeed a ‘side effect’, it is quite a lucrative one for banks but quite expensive for taxpayers.    

These interest payments are more than just a side-effect. They call for a public debate, in which central bankers defend the large, increasing and by now structural handouts. Why was, for example, an exemption possible in 2019 but not now? It is time for political parties, unions and non-governmental organisations to hold central bankers to account.

David Hollanders
David Hollanders

David Hollanders is a lecturer in economics in the Department of European Studies at the University of Amsterdam.

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