What is the two-tier system for remunerating excess reserve holdings?
The two-tier system introduced a different rate of remuneration for part of a credit institution’s current account
holdings in excess of minimum reserve requirements. In particular, the two-tier system can be used to exempt part of
these holdings from the deposit facility rate (DFR) when the rate is negative.
Deposit facility holdings are not subject to the two-tier system and are instead remunerated at the DFR,
irrespective of whether it is positive, negative or zero. The rate on the deposit facility – when it is positive –
is paid only to the extent that banks make recourse to this standing facility as opposed to holding funds on their
current accounts.
The Eurosystem introduced the two-tier system in September 2019, with the aim of supporting the bank-based
transmission of monetary policy, while preserving the positive contribution of negative rates to the accommodative
stance of monetary policy and to the continued sustained convergence of inflation to the ECB’s aim.
The two-tier system applied as of the seventh maintenance
period of 2019, starting on 30 October 2019.
Following the Governing Council decision on 8 September 2022 to raise the DFR to above zero, it is now not necessary to exempt part of credit institutions’ excess reserves. The Governing Council therefore decided, on the
same date, to formally suspend the two-tier system by setting the multiplier – the multiple of the reserve
requirements exempted from a negative DFR – to zero.
The two-tier system had, however, already become redundant after the Governing Council decision, on 21 July 2022,
to raise the DFR to zero.
Which institutions can benefit from the two-tier system?
All credit institutions subject to minimum reserve requirements under Regulation ECB/2003/9
are eligible for the two-tier system. The minimum reserve requirements are mainly based on bank customers’ deposits.
In this sense, the use of minimum reserve requirements for the calculation of the exemption allowance ensures that
the two-tier system focuses on banks whose business models rely on deposit funding, which are typically the main
lenders to the real economy in the euro area.
How does it work?
The two-tier system applies to average end-of-calendar-day excess reserves over the maintenance period held in
reserve accounts with the Eurosystem. It does not, however, apply to excess liquidity held at the ECB’s deposit
facility. The volume of reserve holdings in excess of minimum reserve requirements that is exempt from the DFR is
determined as a multiple of a credit institution’s minimum reserve requirements. This is known as the “allowance”.
The multiplier is the same for all credit institutions. The non-exempt excess reserve holdings continue to be
remunerated at zero percent or the deposit facility rate, whichever is lower.
What is the applicable multiplier and remuneration rate of the allowance?
The Governing Council decided on 12 September 2019 to set the initial multiplier for the calculation of the
allowance at six, and the initial applicable remuneration rate at 0%.
On 8 September 2022 the Governing Council decided to set the multiplier to zero with effect from the maintenance
period starting on 14 September 2022.
Can the multiplier and/or the allowance remuneration rate be changed?
Both the multiplier and the allowance remuneration rate can be changed over time. The Governing Council may change
both to ensure that the two-tier system fulfils its purpose.
Any adjustment to the multiplier or to the remuneration rate applies as of the following maintenance period, after
such a decision has been announced.
Main technical characteristics of the two-tier system
Eligible institutions: all credit institutions subject to minimum reserve requirements (MRR) under
Regulation ECB/2003/9
Allowance: a multiple of an institution’s MRR
Multiplier (m): set to zero
as of 14 September 2022 – this can be changed over time
Exempt amount: amount of excess
reserves up to the allowance
Remuneration rate of the
allowance: 0% – this can be changed over time
Applicability: excess reserves (i.e.
reserve holdings in excess of
MRR) held in reserve accounts with the Eurosystem (and excluding holdings at the Eurosystem’s deposit facility)
Start date: 30 October 2019 (the start of the seventh maintenance period of 2019)
Notes:
MRR = maximum (zero; reserve base * reserve ratio – lump-sum allowance). MRR are calculated as a percentage of
the institution’s reserve base minus the lump-sum allowance with a lower bound of zero. Further information on
minimum reserves and reserve accounts can be found in Regulation ECB/2003/9.
