Government deposits held with the Eurosystem are one of the autonomous factors influencing liquidity conditions in the euro area. They include deposits held by national treasuries and local government entities, as well as deposits held by European Union bodies such as the European Stability Mechanism and the European Financial Stability Facility. Government deposits are reported under position L 5.1 in the Weekly financial statement of the Eurosystem. Deposits held by the European Commission and the Single Resolution Board are reported under item L 6 of the Eurosystem balance sheet, for statistical reasons.
Both the amount and the volatility of government deposits held with the Eurosystem vary across national central banks. This is influenced by a number of factors, such as the different cash and debt management policies of national treasuries and other government account holders, as well as Eurosystem remuneration policies.
The remuneration provisions for government deposits are set out in Guideline (EU) 2019/671 of the European Central Bank of 9 April 2019 on domestic asset and liability management operations by the national central banks (recast) (ECB/2019/7) and Decision (EU) 2019/1743 of the European Central Bank of 15 October 2019 on the remuneration of holdings of excess reserves and of certain deposits (recast) (ECB/2019/31). These legal acts, and subsequent revisions based on a decision taken by the Governing Council on 6 February 2023 (see below), set out some common remuneration provisions that are applicable throughout the Eurosystem.
Prior to the introduction of a negative deposit facility rate in June 2014, government deposits were remunerated at a fixed rate of 0%, except for a small portion to which market rates applied. When the deposit facility rate was reduced to below zero, a cap was placed on the remuneration of government deposits by introducing a ceiling at the lower of the deposit facility rate or the relevant money market rates for as long as the deposit facility rate remained below zero. The decision gave national central banks discretion to apply a lower rate if deemed appropriate.
When lifting the deposit facility rate above zero in September 2022, the Governing Council decided to temporarily remove the remuneration ceiling of 0% until 30 April 2023 in order to preserve the effectiveness of monetary policy transmission and safeguard orderly market functioning. The remuneration of overnight government deposits thus continued to be capped at the lower of either the deposit facility rate or the euro short-term rate (€STR). This decision was intended to prevent an abrupt outflow of deposits into the market at a time when there were signs of a scarcity of collateral in some segments of the euro area repo markets.
On 6 February 2023 the Governing Council decided to adjust the remuneration of government deposits by setting a ceiling at the €STR minus 20 basis points, applicable from 1 May 2023. This measure aims to provide incentives for a gradual and orderly reduction of such deposits in order to minimise the risk of adverse effects on market functioning and ensure the smooth transmission of monetary policy.
The Governing Council will continue to monitor money market developments and the evolution of these deposit holdings, and it stands ready to make further adjustments to the remuneration regime if necessary.