The note analyses the functioning and possible side effects of the two-tier system of remuneration of banks' excess reserves adopted in September 2019 by the Governing Council of the ECB. This measure aims at reducing the possible risks of the negative interest rate policy for the lending channel of monetary transmission. The note also describes the first effects of the introduction of this new monetary tool.
The calibration of the parameters of a two-tier system is a complex exercise aimed at preserving banks' ability to provide credit to the economy, while guaranteeing the smooth functioning of the money market. Its introduction has so far resulted in a more even distribution of liquidity across euro-area banks and countries and has taken place without any significant tensions in short-term interest rates. This suggests that no major cross-country fragmentations exist at this stage in euro-area money markets.
