Central Bank Liquidity Reallocation and Bank Lending: Evidence from the Tiering System

Abstract

We document that the reallocation of central bank reserves towards banks with higher liquidity needs fosters bank lending. Exploiting the ECB’s tiered reserve remuneration system for identification, we show that this system encouraged banks with ex ante low reserve holdings to obtain more reserves through the money market. Having increased their resilience against liquidity shocks, these banks lowered their securities holdings and extended more credit. We find no negative effects on the loan supply of banks with ex ante high reserves, which decreased their reserves holdings, and our results are not driven by banks’ exposures to other policy measures.

Keywords: money market; excess reserves; bank lending; negative interest rate policy

JEL Classification: G2; E5