German and French banks stand to benefit the most from the European Central Bank's two-tiered remuneration system for excess liquidity aimed at mitigating the cost of negative rates to eurozone lenders.
The new program, which provides relief to banks based on the size of their current account and deposit account balances, will help German lenders avoid €1 billion of charges, while French banks will save €800 million and Spanish institutions €400 million, according to July-end calculations published by Danske Bank on Sept. 13.
The cost of negative rates to eurozone banks totaled €7.7 billion per year under the 40-basis-point regime without tiering, thanks to mounting excess liquidity they have to hold at the ECB. German and French banks hold approximately 61% of the aggregate current account and deposit balances, while other core countries, such as the Netherlands, also have large balances.
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The annual cost of the negative 0.50% deposit rate is estimated to total €5.9 billion per year under the tiering system, compared to €9.6 billion without tiering, Danske Bank Senior ECB and eurozone Analyst Piet P. H. Christiansen and Senior Analyst Aila Mihr wrote in the note.
Italy is the only country that is unlikely to benefit from the new system.
The ECB's excess liquidity is the sum of current account minus reserve requirements and deposit facility minus marginal lending facility.

The central bank's negative rate on the deposit facility holdings will continue, with only excess balances in current accounts exempt from negative rates. The exemption will be set at 6x minimum reserve requirements, and though the multiple could be adjusted over time, Troiano said the uniform multiplier makes no adjustment for the uneven distribution of excess liquidity across the eurozone.
Troiano projects that the current multiplier would exempt around €800 billion from negative interest rates, which is less than half of the bloc's €1.7 trillion in excess liquidity holdings at August-end. The annualized cost on excess liquidity will be €4.6 billion per year, down from €8.5 billion without tiering, he said, slightly lower than the Danske Bank estimates.
"While the multiplier has been set so as to not interfere with money markets in countries with the lowest levels of excess liquidity such as Italy and Spain, it is insufficient where it matters most: for banks in countries with high excess reserves," Troiano added.
Meanwhile, Rabobank projects up to €720 billion that may be exempted under the new system, higher than €450 billion that Rabobank thought would be enough to compensate banks for the additional 10-basis-point rate cut.
Bas van Geffen, Rabobank's quantitative analyst, and Elwin de Groot, Rabobank's head of macro strategy, inferred that the ECB is over-compensating for its decision to lower the deposit rate.
"On balance, this is positive, especially for lenders with large accounts at the central bank," Rabobank said in a note.
The two-tiered system will take effect as of the October reserve maintenance period.

