ECB kept negative rates, taxing only part of bank cash

In 2019 the ECB's deposit facility rate was deeply negative, which pushed banks to pay the central bank for parking excess cash. That squeezed the deposit-funded banks that transmit monetary policy to the real economy, and some banks began passing the cost to customers.

The Governing Council's September 2019 answer was a two-tier system. Instead of dropping the negative rate, it made a portion of each institution's excess reserve holdings (a multiple of its minimum reserve requirement) exempt from the penalty rate. The rest stayed penalised, preserving the accommodative signal.

The design is clever because the exemption is tied to reserve requirements, which are driven by customer deposits. That means the relief lands on banks whose business is deposit funding, precisely those most exposed to negative rates, while the overall stance stays loose.