Q&A related to the two-tier system for remunerating excess reserve holdings

1. General questions

Q1. What amount of excess reserves can be exempted from remuneration at the rate of the deposit facility (DFR)?

A: The allowance, which equals a multiple of an institution’s minimum reserve requirements (MRR). The multiple is currently set to six. Note that this multiplier can be changed by the Governing Council over time.

Q2. Does the allowance implied by the multiplier include the minimum reserve requirements?

A: No, it doesn’t.

Q3. Are total reserves not subject to remuneration at the DFR effectively equal to seven times MRR?

A: Yes, at this point in time. The amount of excess reserves that is exempt from remuneration at the DFR is determined by MRR times a multiplier of six. In addition, MRR will continue to be remunerated at the average rate on the ECB’s Main Refinancing Operations (MRO) rate – currently 0% – over the maintenance period. Therefore, the total reserve holdings remunerated at 0% will amount to seven times MRR. The important difference is that the fulfilment of MRR is mandatory while the degree to which the allowance is used is entirely up to the counterparty.

Q4. What is the function of the multiplier?

A: The two-tier system for excess reserve remuneration aims to support the bank-based transmission of monetary policy in the euro area, without unduly influencing euro short-term money market rates. The multiplier and the rate of remuneration are set to support this purpose and may be adjusted by the Governing Council over time.

Q5. When will the two-tier system take effect?

A: The two-tier system will first be applied in the seventh maintenance period of 2019 starting on 30 October. The remuneration will be calculated at the end of each maintenance period.

Q6. Which reserve holding accounts are exempted from the remuneration at the DFR?

A: The two-tier system only applies to average end-of-calendar-day balances over the maintenance period, above MRR, that are held in reserve accounts with the Eurosystem and up to the allowance. It does not apply to holdings at the Eurosystem’s deposit facility. Liquidity holdings on other central bank accounts that are not used to fulfill reserve requirements are not eligible.

Q7. Will the multiplier and the interest rate applied to the allowance remain unchanged?

A: The Governing Council can change the remuneration rate of the allowance and/or the multiplier over time. These adjustments will apply from the following maintenance period after the related decisions have been made public.

Q8. Besides the allowance and its rate, are there any other modifications in the remuneration process of reserve holdings held in current accounts?

A: No, the remuneration process will remain the same. At the end of each maintenance period the average end-of-calendar-day balances will be calculated for each credit institution. The MRR will be remunerated at the average MRO rate, the excess reserves up to the allowance at 0%, and the reserves exceeding the allowance either at 0% or at the DFR, whichever is lower.

Q9. What is the rate used to remunerate the non-exempt amount of excess reserves?

A: The non-exempt amount of excess reserve holdings will continue to be remunerated at 0% or the DFR, whichever is lower.

Q10. Will the two-tier system for the remuneration of excess reserve holdings also apply to cash margins provided by counterparties?

A: No, the two-tier system would not apply to cash margins. Accordingly cash margins remain part of the non-exempted amount subject to the DFR. For more details, please refer to Article 136 (4) of the General Documentation (Guideline ECB/2014/60).

2. Questions related to MRR

Q11. How will the allowance be calculated for an institution that uses an intermediary to fulfil minimum reserves?

A: The allowance will only apply to excess reserves held by the institution that directly fulfils MRR.

Q12. A bank fulfils its MRR through an intermediary and also holds an account that is not used to fulfil MRR. Are reserve holdings in this account also exempted from remuneration at the DFR?

A: No. The exemption on excess reserves will apply only to the reserve account of the intermediary. The allowance is calculated based on the multiplier times the aggregated MRR that are to be fulfilled by the intermediary.

3. Questions related to the calculation

Q13. Who is responsible for calculating the exempt amount?

A: The National Central Banks (NCBs) will calculate the allowance applicable to excess reserve holdings, the respective exempt amount and the remuneration of reserve holdings. Credit institutions will not have to take any action.

Q14. How are the allowance and the non-exempt amount calculated?

A: The allowance only applies to excess reserves. Excess reserves are calculated by deducting MRR from the average amount of liquidity on reserve account(s). The allowance is then the multiplier times MRR, applicable to the amount of excess reserves.

Let’s consider:
MRR = an institution’s minimum reserve requirements for a given maintenance period;
m = the relevant multiplier (which is the same for all institutions, e.g. m = 6);
AL = the institution’s allowance;
ARH = the average end-of-calendar-day balances in the institution’s reserve account, calculated over the maintenance period;

The allowance is calculated as AL = m * MRR.

Then, if:
1) ARH – MRR – AL > 0, then the part AL of ARH will be remunerated at the applicable remuneration rate for the allowance (e.g. 0%); while ARH – MRR – AL will be remunerated at zero percent or the deposit facility, whichever is lower.
2) ARH – MRR – AL < 0, then ARH – MRR will be remunerated at the applicable remuneration rate for the allowance.

In any case, the MRR will continue to be remunerated at the MRO rate.

Q15. How is the allowance calculated, taking into account the possibility of fulfilling MRR on average during a maintenance period?

A: The size of the allowance is determined on the basis of average end-of-calendar-day balances in the institution’s reserve accounts over a maintenance period.

Q16. Why does the two-tier system apply to excess reserves in the reserve account, but not the deposit facility?

A: Excess reserve holdings in the reserve account are always remunerated at the end of the maintenance period while balances on the deposit facility are remunerated overnight. The size of the allowance is calculated based on average end-of-calendar-day balances over a maintenance period, which is consistent with the timing of remuneration of the MRR.

Q17. When is interest on excess reserves calculated and paid? Is it calculated on a daily basis?

A: Interest on the excess reserve holdings in banks’ reserve accounts (i.e. excess reserves) will be calculated at the end of each maintenance period and debited/credited two working days after the end of the maintenance period.

4. Examples

Counterparty A is required to hold €10 million in minimum reserves, has an average reserve account balance of €45 million, and holds no funds in the deposit facility. The two-tier remuneration system is applied as follows:

  Data
1 MRR (1)
10,000,000
2 Average Reserve accounts (RA) in MP (2)
45,000,000
3 Deposit Facility (3)
0
  Calculation
4 Excess liquidity (2+3-1)
35,000,000
5 Excess reserves (ER = RA-MRR)
35,000,000
6 Allowance = MRR*6 (multiplier)
60,000,000
  Remuneration
(r)
7 MRR
10,000,000
MRO rate=0%
8 Exempt amount [Min (5 and 6)] 
35,000,000
0%
9 Non-exempt amount [ER -Allowance]
0
DFR = - 0.5%
10 Deposit Facility 
0
DFR = - 0.5%
  TOTAL RA+DF
45,000,000

Counterparty B is required to hold €10 million in minimum reserves, has an average reserve account balance of €160 million, and holds €20 million in the deposit facility. The two-tier remuneration system is applied as follows:

  Data
1 MRR (1)
10,000,000
2 Average Reserve accounts (RA) in MP (2)
160,000,000
3 Deposit Facility (3)
20,000,000
  Calculation
4 Excess liquidity (2+3-1)
170,000,000
5 Excess reserves (ER= RA-MRR)
150,000,000
6 Allowance = MRR*6 (multiplier)
60,000,000
  Remuneration
(r)
7 MRR
10,000,000
MRO rate=0%
8 Exempt amount [Min (5 and 6)] 
60,000,000
0%
9 Non-exempt amount [ER -Allowance]
90,000,000
DFR = - 0.5%
10 Deposit Facility
20,000,000
DFR = - 0.5%
  TOTAL RA+DF
180,000,000