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Euro zone banks fully utilizing ECB’s two-tier rate scheme

FRANKFURT (Reuters) – Euro zone banks are making almost full use of the European Central Bank’s two-tier deposit facility as they have redistributed excess liquidity to take advantage of an exemption from the most punitive charges, the ECB said on Friday.

The ECB introduced the facility on Oct. 30 to relieve some pressure on bank earnings from its minus 0.5% deposit rate, which functions as a charge on the more than 1.5 trillion euros worth of excess liquidity banks hoard.

Under the system, up to six times the mandatory reserves are exempted from the charge and banks only pay the minus 0.5% on any liquidity above that figure.

“On … the day the two-tier system came into effect, banks reduced their unused exemption allowances from 28% to 13% of total exemption allowances,” the ECB said in a bulletin article.

As banks continued to trade their excess liquidity in the money market, less than 5% of exemption allowances were left unused by Dec. 11, the ECB added.

The ECB also dismissed some market views that the two-tier system amounted to a de facto rate increase as money market rates would be pushed up by the scheme.

“Although the increase in trading activity temporarily coincided with higher money market rates, experience with the two-tier system over its first six weeks shows that money market rates were only marginally affected and remain well aligned with the policy rate,” the ECB added

(Reporting by Balazs Koranyi, editing by Larry King)


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