Market reaction to the two-tier system

Luca Baldo, Cristina Coutinho and Nick Ligthart

Economic Bulletin Boxes, 2019, vol. 8

Abstract: On 30 October 2019 the ECB implemented a two-tier system under which a portion of credit institutions’ excess liquidity holdings with the Eurosystem are exempt from remuneration at negative rates. The aim of the two-tier system is to support the bank-based transmission of monetary policy in preserving the overall positive contribution of negative rates to the accommodative stance of monetary policy. With the introduction of the two-tier system banks holding less excess liquidity than their exemption allowance increased their excess liquidity holdings by borrowing from banks exceeding their exemption allowances. The bulk of banks’ increased borrowing in the money market occurred via secured transactions. Although the increase in trading activity temporarily coincided with higher money market rates, experience with the two-tier system over its first month shows that money market rates were only marginally affected and remain well aligned with the policy rate. JEL Classification: E52, E58, G1

Keywords: deposit facility; excess liquidity; exemption allowance; money markets; Two-tier system (search for similar items in EconPapers)
Date: 2019-12
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