A Tiering Rule to Balance the Impact of Negative Policy Rates on Banks

Negative interest rate policy makes excess liquidity costly to hold for banks and this may weaken the bank-based transmission of monetary policy. We propose a rule-based tiering system for excess reserve remuneration that automatically adjusts for changes in the overall volume of excess reserves. This system is designed to reduce the burden of negative rates on banks while ensuring that the central bank keeps control of interbank rates. Using euro-area data, we show that under the proposed tiering system, the cost of holding excess liquidity when the COVID-19 monetary stimulus fully unfolds would be more than 30% lower than that under the ECB's current system.