Abstract:
Exploiting the introduction of the ECB’s tiering system for remunerating excess reserve holdings, we document the importance of access to the money market for bank lending. We show that the announcement of the two-tier system produced positive wealth effects for banks with excess reserves and that the associated incentives to reallocate liquidity toward banks with unused exemptions decreased the segmentation in the money market. The monetary policy transmission is enhanced because banks with unused allowances obtain easier access to the money market and extend more credit than other banks, including banks with excess liquidity whose valuations increase the most.