Excess reserves and the two-tier system for their remuneration

Excess reserves is the name given to credit institutions’ deposits on current accounts with the central bank beyond the required reserves. At present (with negative rates being applied to the deposit facility), these deposits are remunerated at the deposit facility rate. The Eurosystem’s accommodative monetary policy operations saw the aggregate stock of excess reserves in the banking sector increase sharply in size. 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, the ECB Governing Council decided on 12 September 2019 to introduce a two-tier system for remunerating excess reserve holdings. As a result, a certain portion of the excess reserves is remunerated at a higher rate for monetary policy counterparties.

The amount remunerated at a higher rate than the deposit facility rate is linked to the individual counterparty’s minimum reserve requirements and is calculated as a multiple thereof, with the ECB Governing Council setting both the multiplier and the remuneration rate applicable to that amount.

Much like the averaging provision applied under the minimum reserve system, the average of a maintenance period is used to determine the excess reserves.

Balances held at the deposit facility are always remunerated at the deposit facility rate, however. Only balances held in accounts that are also counted towards the minimum reserves determine the portion of excess reserves subject to the higher rate of remuneration.

The decisions of the ECB Governing Council entered into force at the start of the maintenance period that began on 30 October 2019.