ESCB Standing Facilities & Minimum Reserve Requirements

ESCB Standing Facilities

Entities that operate with the European System of Central Banks (ESCB) have access to two standing facilities:

Marginal Lending Facility

Counterparties can use the marginal lending facility to obtain overnight liquidity against collateral. Under normal circumstances, there are no credit limits or other restrictions on access to this facility for entities, apart from the requirement to provide adequate collateral.

Deposit Facility

Counterparties can use the deposit facility to make overnight deposits. Under normal circumstances, there are no limits or other restrictions on these deposits. The interest rate on the deposit facility normally provides a floor for the overnight market interest rate.

Interest Rate Corridor

Interest rates on these facilities are set by the Eurosystem. As a rule, the rate on the marginal lending facility is one point above the interest rate on the main refinancing operations, and the deposit facility rate is one point below. Since the maturity of the standing facilities is one day, fluctuations in the overnight interbank market interest rates are limited by the corridor that these standing facility rates create.

The Reserve Requirement

Under the reserve requirement system, credit institutions in the euro area must hold compulsory deposits in their central bank. This is a minimum percentage of certain liabilities, such as deposits and other resources obtained from third parties, which excludes interbank funding.

Coefficient Level

The ECB has set the level of the coefficient to range from a low of 0% to 10%. It is currently set at 2%. This percentage corresponds to the so-called "technical minimum" or "technical coefficient of liquidity," which is a level compatible with the estimation of the basic movements of liquidity in the system.

Objectives of the Reserve Requirement

The objectives of the reserve requirement are twofold:

• To stabilize money market interest rates.
• To allow the ECB to affect structural liquidity by altering the coefficient.

Averaging Mechanism

To contribute to the stabilization of interest rates, the ESCB allows institutions to use an averaging mechanism. With this mechanism, compliance with the reserve requirement is determined based on the average daily cash assets that institutions hold over a one-month period.

Remuneration

Mandatory deposits held by entities as minimum reserves are remunerated at the interest rate of the main refinancing operations of the ESCB.