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 design a rule-based tiering system for excess reserve remuneration that reduces the burden of negative rates on banks while ensuring that the central bank keeps control of interbank interest 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.