Two-tier system for remunerating excess reserve holdings

What is the two-tier system for remunerating excess reserve holdings?

The two-tier system exempts credit institutions from remunerating, at the negative rate currently applicable on the deposit facility, part of their excess reserve holdings (i.e. reserve holdings in excess of minimum reserve requirements). To make this possible, the two-tier system introduces a new remuneration structure with two distinct rates applicable to different parts of the excess reserve holdings of credit institutions.

The two-tier system aims to support the bank-based transmission of monetary policy, while preserving the positive effect that negative rates can have on the accommodative stance of monetary policy, and towards the sustained convergence of inflation to the ECB’s aim.

When does it start?

The two-tier system applies as of the seventh maintenance period of 2019, starting on 30 October 2019.

Which institutions can benefit from the two-tier system?

All credit institutions subject to minimum reserve requirements under Regulation ECB/2003/9 are eligible for the two-tier system.

How does it work?

The two-tier system applies to average end-of-calendar-day excess reserves over the maintenance period held in reserve accounts with the Eurosystem, but does not apply to excess liquidity held at the ECB’s deposit facility. The volume of reserve holdings in excess of minimum reserve requirements that is exempt from the deposit facility rate is determined as a multiple of a credit institution’s minimum reserve requirements – what is known as the “allowance”. The multiplier is the same for all credit institutions. The non-exempt excess reserve holdings continue to be remunerated at zero percent or the deposit facility rate, whichever is lower.

What is the applicable multiplier and remuneration rate of the allowance?

The Governing Council has decided to set the initial multiplier for the calculation of the allowance at six, and the initial applicable remuneration rate at zero percent.

Could the multiplier and/or the allowance’s remuneration rate be changed?

Both the multiplier and the allowance’s remuneration rate can be changed over time. The Governing Council will set the multiplier at a level that ensures that euro short-term money market rates are not unduly influenced. The multiplier may also be adjusted in line with changing levels of excess liquidity. Any adjustment to the multiplier or to the remuneration rate will apply as of the following maintenance period after such a decision is made public.

Main technical characteristics of the two-tier system

Eligible institutions: all credit institutions subject to minimum reserve requirements (MRR) under Regulation ECB/2003/9
Allowance: a multiple of an institution’s MRR
Multiplier (m): currently set to six – it can be changed over time
Exempt amount: amount of excess reserves up to the allowance
Remuneration rate of the allowance: 0% – this can be changed over time
Applicability: excess reserves (i.e. reserve holdings in excess of MRR) held in reserve accounts with the Eurosystem (and excluding holdings at the Eurosystem’s deposit facility)
Start date: 30 October 2019 (the start of the seventh maintenance period of 2019)

Notes:
1. The multiplier and the remuneration rate may be adjusted by the Governing Council and these changes will apply on the following maintenance period after such decision.
2. Remuneration of the non-exempt amount of excess reserves will remain at zero percent or the rate of the deposit facility (DFR), whichever is lower.
3. MRR = maximum (zero; reserve base * reserve ratio - lump-sum allowance). MRR are calculated as a percentage of the institution’s reserve base minus the lump-sum allowance with a lower bound of zero. Further information on minimum reserves and reserve accounts can be found in Regulation ECB/2003/9.

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