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Deposit facility rate, bank reserves, and portfolio reallocation incentives

Author(s): Manuel Buchholz, Kirsten Schmidt, Lena Tonzer

Date published: Dec 2019

SUERF Policy Note, Issue No 118
by Manuel Buchholz, Kirsten Schmidt, and Lena Tonzer


JEL-codes: E52, G11, G21.
Keywords: Bank portfolio reallocation, central bank reserves, monetary policy, deposit facility rate.

Over recent years, the European Central Bank has repeatedly lowered the deposit facility rate, which is the rate at which banks’ reserves at the central bank are remunerated. A recent Bundesbank discussion paper assesses whether this policy resulted in a differential responsiveness of banks in reallocating reserves into loans. In particular banks that have accumulated more reserves and banks with a more interest-sensitive business model should be more sensitive to changes in the policy rate. While there is evidence for portfolio reallocation, this result is mainly driven by banks in liquidity-rich countries. This in turn suggests that the effectiveness of the deposit facility rate might be hampered in fostering monetary policy transmission across euro area countries.

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SUERF Policy Note, Issue No 118SUERF Policy Note, Issue No 118

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