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.

 

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