Implications of two-tier deposit rates for the ECB

Around EUR640 billion is being deposited overnight at ECB currently, of which around EUR110bn covers minimum RR, remunerated at MRO rate, i.e. 5 bp, which leaves EUR 530 billion in excess, subjecting to ECB deposit rate, whether it is put in CA or deposit facility.

As a result, Eonia is dragged down in the corridor currently fixing at -14bp, -6bp over the depo rate. The deposit rate spread is consistent with the level after the 2012 LTROs , resulting sharp rise in the liquidity, which is how Eonia is currently fixed at its low bound in the corridor.

The main motivation is to reduce the operations cost to the banking system, which is motivating factor in the case of Denmark.

There would be cash hoarding, if the negative rates are passed on to the retail customers. Theoretically, if higher share can be put to higher depo rate, it should not lead to higher Eonia fixings, which is marginal rate determining overnight fixing.

"Despite the euro market being much bigger than the Danish market, the quoted turnover in the Eonia fixings is around EUR10bn - only 2% of current excess liquidity. Therefore, the fixing is very vulnerable to even small changes in behaviour", says Danske bank in a research note.