At the meeting yesterday, the ECB announced a tiering system for reserve remuneration (starting 30 October 2019) to support the bank-based transmission of monetary policy. The system allows banks to place a multiple of their minimum reserve requirements at an upper tier, which is 0%, while leaving the non-exempted at the deposit rate or 0% (which of them are lower). This only applies to the current account.

The ECB has set the multiple at 6 but is ready to adjust the multiplier so that the ‘euro short-term money market rates are not unduly influenced'. The remuneration rate of the exempt tier and the multiplier can be changed over time. The tiering system has features of the Swiss tiering system.

The system is relatively simple in itself as it is based on the already computed reserve requirements. However, given the rather heterogeneous euro area banking sector, it may be rather complex for the market and have side effects such as for the Italian bond market. The system is foreseen to give a sizeable relief to in particular core banks. We highlighted further reflections in Watchers conference: is a tiering system really the answer?, Mitigating side effects – gauging the tiering premium and New ECB call - rate cut and restart of QE.

Ultimately, markets did not receive the tiering system favourably, as both money market rates and short end government bond yields rose sharply after the announcement of the tiering system modalities. December 2019 Euribor rose 7bp after the announcement.

The introduction of the tiering system is set to result in the weighted deposit rate at the ECB being around -28bp, which effectively is tighter than the current rate just shy of - 40bp. That also means that despite the 10bp cut in the deposit rate, the banks' weighted deposit rate overall in the euro area is set to rise.

 

Download The Full ECB Research

This publication has been prepared by Danske Bank for information purposes only. It is not an offer or solicitation of any offer to purchase or sell any financial instrument. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and no liability is accepted for any loss arising from reliance on it. Danske Bank, its affiliates or staff, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives), of any issuer mentioned herein. Danske Bank's research analysts are not permitted to invest in securities under coverage in their research sector.
This publication is not intended for private customers in the UK or any person in the US. Danske Bank A/S is regulated by the FSA for the conduct of designated investment business in the UK and is a member of the London Stock Exchange.
Copyright () Danske Bank A/S. All rights reserved. This publication is protected by copyright and may not be reproduced in whole or in part without permission.

Analysis feed

Latest Forex Analysis

Editors’ Picks

AUD/USD extends recovery gains to 0.6850 despite China’s coronavirus harming risk-tone

AUD/USD stays on the front-foot while taking rounds to 0.6845 amid the initial Asian session on Friday. The pair recently reacted to the preliminary readings of the Commonwealth Bank (CBA) PMI details for January.

AUD/USD News

USD/JPY falls to fresh lows, correcting on WHO statement

USD/JPY has tumbled to print fresh lows since failing on the 110 handle, scoring 109.26 and meeting the 200-moving average on the four-hour chart.

USD/JPY News

Crypto Today: Bitcoin bears force critical

BTC/USD is currently trading at $8,400 (-3.40%) in the afternoon in U.S. hours, as markets bears break critical $8500 price mark, allowing for a wave of further downside pressure. 

Read more

XAU/USD bulls challenging 1573 resistance level

XAU/USD is trading in a bull trend above its main daily simple moving averages (SMAs). After rejecting the 1600 figure earlier in January, the metal has been consolidating near the $1560 per troy ounce.

Gold News

GBP/USD pressured toward 1.31 amid risk-off mood

GBP/USD is trading around 1.31, off the highs. Coronavirus headlines are sending traders to the safety of the US dollar. Speculation about the next BOE move is rife.

GBP/USD News

Forex Majors

Cryptocurrencies

Signatures