Design of remuneration schedules
(Extract from page 35 of BIS Quarterly Review, March 2016)
In general, the four central banks are applying negative rates to the majority of accounts on their books with a view to limiting the potential for arbitrage between accounts.
The ECB, DN and SNB use some combination of exemption thresholds in computing the negative remuneration. The design and calibration of the remuneration schedules reflect a combination of the policy goals and the existing implementation frameworks. The SNB's exemption thresholds are determined in one of two ways. The first approach applies to all banks that have to fulfil minimum reserve requirements. This exemption threshold currently corresponds to 20 times the minimum reserve requirement prior to implementation (a static component) minus/plus any increase/decrease in the amount of cash held (a dynamic component). The dynamic component aims to prevent account holders from substituting cash for sight deposits. The second approach defines a fixed exemption threshold for all account holders not subject to the minimum reserve requirement. The minimum fixed threshold is CHF 10 million, a level chosen so as not to inhibit an institution's ability to settle Swiss franc payments.
While new for the SNB, tiered remuneration was already part of the operational framework at the other three central banks. In the Eurosystem, required reserves earn the Main Refinancing Operations (MRO) rate - currently at 5 basis points - whereas excess reserves currently "earn" -30 bp. In Denmark, the central bank offers one-week certificates of deposit funds with a yield currently at -65 bp. In contrast, overnight demand deposits in the current account earn zero. Both an aggregate limit and individual limits have been set on the amount of funds that can be held in the current accounts. If the aggregate limit is exceeded at the end of the day, then deposits exceeding the individual limits are converted into certificates of deposit. In addition to interest rates, DN has actively varied the current account limits - most recently increasing them in March 2015, and then lowering them in August 2015 and January 2016.
In Sweden, the Riksbank currently issues one-week debt certificates. Moreover, daily fine-tuning operations aim to drain any remaining reserves prior to the close of business, and hence banks hold only small amounts as overnight deposits with the central bank. At the moment, one-week debt certificates "yield" -50 bp and fine-tuning operations earn -60 bp, while any residual amounts left in the current account face a negative "remuneration" of -125 bp.
With the move below zero, the Bank of Japan adopted a remuneration schedule that will divide balances in the current accounts of financial institutions into three tiers. The three tiers are remunerated at +10 bp, 0 bp and -10 bp, respectively.
For government deposits, the treatment varies. In Switzerland, the sight deposits of the Federal Administration are exempt but balances are being monitored. In Denmark, government deposits earn negative interest only above a certain threshold; whereas in the euro area, government accounts are de facto subject to negative rates due to de minimis exemptions. In Sweden, the Riksbank has not been the government's bank since 1994.