ECB’s Weidmann: Wouldn’t Exclude Tiering System Threshold Changes

30 October 2020



By David Barwick – FRANKFURT (EconoStream) – European Central Bank Governing Council member Jens Weidmann said Friday that he would not exclude modification of the threshold relevant for banks’ reserve holdings under the ECB’s tiering system.

In an online discussion with students about monetary policy, Weidmann, who heads the Bundesbank, said, ‘I don’t believe however that we will make a policy instrument of this threshold that plays a role in the tiering system.’

The policy instrument remains the interest rate, he said. ‘And inasmuch, I wouldn’t exclude that we can adjust [the threshold] now and again, but not in the sense of a monetary policy instrument, but rather only in designing an instrument so as to reduce the side effects’, he added.

The ECB’s tiering system, which went into effect a year ago, establishes how different portions of the money a credit institution has on deposit at the ECB are treated under the negative interest rate regime. In particular, an interest rate of zero is applied to an amount of money up to six times the minimum reserve requirement of a given bank. To the rest of the bank’s deposits, the ECB applies the deposit facility rate, which has been at -0.5% since September of last year.

In this way, the ECB seeks to safeguard both the transmission via banks of its monetary policy and the benefit in terms of monetary accommodation of negative interest rates. As Weidmann said on Friday, the tiering system came about ‘out of concern that the negative interest rate, if we had just gone and applied it unfiltered, would have weighed on the profit situation of the banks so much that in turn the monetary policy transmission would have been in danger.’

Weidmann is not the only Governing Council member to suggest that there could be a change to the threshold defining what portion of credit institutions’ liquidity holdings is exempt from negative remuneration.

Asked in June if there should be an increase in the threshold, Banque de France Governor François Villeroy de Galhau responded that he had been ‘one of the biggest advocates of tiering, and it is a big success. … If we can optimize the exempt amount in the future, why not?’