The two-tier deposit rate system and ECB

ECB's main motivation behind its two-tier deposit rate system is to reduce the banking system costs. Cutting the deposit rate further implies high costs to banking systems, as long as banks introduce negative deposit rates on retail deposits and pass on the cost to the retail costumer directly.

This deposit rate scheme is to reduce the cost. In this some liquidity is put at the higher deposit rate, where there also will be potential negative effects from scheme like this.

It is learned from Denmark's experience that it is possible and banking system will be benefited from this. It could also create negative side effects in a higher spread between overnight rate, low deposit rate and large volatility in fixings.

But in Danish market, there is uncertainty transferred to other money-market rates that are short term.

"For the EUR market, we would expect a smaller effect on the Eonia rate but it could result in a slightly higher spread to the lower deposit rate", says Danske bank in a research note.