Should central banks tier reserves?

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Monetary policy tightening after QE has led to central bank losses, largely because of higher interest payments on reserves (deposits held by commercial banks at the central bank). As a response, some central banks have tiered reserves, ceasing to remunerate part of them.

by Masatoshi Ando and Álvaro Pina, OECD Economics Department

Monetary policy tightening after QE has led to central bank losses

The balance sheet of central banks is mainly composed of securities such as government bonds on the asset side, and reserves plus currency on the liability side. Central bank profits consist primarily of interest receipts from securities held less interest payments on reserves. In recent years there have been sizeable swings in the net interest income of central banks (Figure 1), with several central banks reporting negative net interest income and financial losses. Such central bank losses have weighed on the public finances, with fewer or no dividends paid to governments and, in some jurisdictions, central banks requiring compensation or recapitalisation. These developments have raised the question as to whether central banks should move to paying interest on only a part of their reserve holdings.

A key factor behind the decline in central bank net interest income after the pandemic was the increase in policy interest rates. This raised interest payments substantially, as commercial bank reserves held at the central bank are typically remunerated at an interest rate equivalent or close to the policy rate. In contrast, there was no commensurate increase in central bank interest income, since most bonds held in 2022-23 were purchased during quantitative easing (QE) episodes when bond yields were extremely low. There has been some improvement since 2024, reflecting policy rate reductions, balance sheet reductions through quantitative tightening and, in some jurisdictions, the acquisition of higher yielding government bonds using the proceeds from maturing low-yield bonds. Nonetheless, low profitability persists and may do so for some time.

Several central banks have taken steps to lower the costs of reserve remuneration

The high costs of reserve remuneration have prompted debate about ways to reduce them, and in particular the possible use of tiered systems (De Grauwe and Ji, 2023; Tucker, 2022; Buetzer, 2022; Whelan, 2021). One option is for a certain amount of reserves to remain (or be made) mandatory and remunerated at a lower rate, possibly zero. These are typically called required reserves, though terminology may vary across countries. Central banks could then steer money market interest rates by remunerating reserves beyond the mandatory amount (termed excess reserves) at or close to the policy rate.

A number of central banks have implemented some form of tiered remuneration of reserves, often with the stated intention of reducing the costs of monetary policy implementation:

• Iceland: The Central Bank of Iceland made a subset of required reserves unremunerated in 2018. The unremunerated reserve ratio was raised from 1% of eligible bank liabilities (e.g. certain deposits) to 2% in June 2023, and to 3% in April 2024, while the remunerated reserve ratio was lowered from 1% to 0% in March 2020 (Central Bank of Iceland, 2018, 2024).
• Euro area: The ECB lowered the remuneration rate of required reserves in two steps, first in December 2022 from the main refinancing operations rate to the deposit facility rate, and then to zero in September 2023 (ECB, 2023).
• Czechia: Required reserves, previously remunerated at the main policy rate (two-week repo rate), ceased to earn interest in October 2023. In addition, from January 2025 the required reserve ratio was raised from 2% to 4% (Czech National Bank, 2023, 2024).
• Switzerland: The SNB stopped remunerating required reserves from December 2023 and increased their amount from July 2024, by increasing the respective reserve ratio from 2.5% to 4% and by expanding the range of financial institution liabilities subject to the reserve requirement (SNB, 2023, 2024).
• Sweden: Legislative changes enacted in January 2025 allow the Riksbank to require credit institutions to hold unremunerated deposits when its equity falls below a certain target level, as is now the case. The Riksbank has been making use of this provision since end-October 2025 (Riksbank, 2024, 2025, 2026).
• Japan: In contrast to the central banks above, some others, including the Bank of Japan, have had a longstanding policy of not remunerating required reserves. Together with tiering for excess reserves, this Bank of Japan policy benefitted commercial banks when the policy rate was negative. Since 2024, when the policy rate became positive, excess reserve tiering has been dropped (Bank of Japan, 2024) and unremunerated required reserves have instead delivered a financial gain to the Bank of Japan.

Tiering reserves reduces central bank interest payments, with the savings greater the higher the policy rate is (Figure 2). For example, estimated savings amounted to nearly 0.2% of GDP in 2024 in Iceland. In the other economies displayed, where policy rates were lower, savings were smaller. The reduction in central bank interest payments is also limited by the relatively low share of unremunerated required reserves in central bank liabilities (often under 10%).

Figure 2. Tiering reserves reduces central bank interest payments

Note: Interest expense savings in Panel B are estimated as the difference between interest expenses without and with tiered remuneration. In the scenario without tiering, required reserves are assumed to be remunerated at the same rates as excess reserves.
Source: Central Bank of Iceland; Czech National Bank; European Central Bank; Sveriges Riksbank; Swiss National Bank; OECD Economic Outlook 119 database; and OECD calculations.

The tiering of reserves poses complex trade-offs

Raising the share of reserves that receive zero or below-policy rate remuneration could potentially yield more substantial interest expense savings, but is not straightforward. Even if a system could be found to ensure that commercial banks would continue to hold excess reserves, potential trade-offs include the possible behavioural responses of commercial banks and their clients, and the impact on future monetary policy choices.

The non-remuneration of required reserves can be regarded as an implicit tax on commercial banks, especially if those reserves are large. (Equally, remuneration of reserves may be an implicit subsidy in some circumstances.) Non-remuneration may incentivise banks to reduce their deposit base (to lower the amount of reserves they are required to hold) and potentially affect credit creation. Deposit relocation could also be substantial (McCauley and Pinter, 2024a), though it could be pre-empted by a history-based reserve requirement rather than one based on current balance sheet quantities (Tucker, 2022). The extent of pass-through to higher lending rates or lower deposit rates would also need to be considered, and it would depend on the degree of competitive efficiency of the banking system and on the mobility and price-responsiveness of different groups of bank customers. Such factors could affect the economic incidence of the implicit tax, making it fall more on companies and households than on banks.

Non-remuneration or lower remuneration of (part of) excess reserves held at the central bank is a further option, but this could also generate changes in commercial bank behaviour. Liquidity regulations are one reason why many commercial banks may hold excess reserves at the central bank (Duffie, 2026). Such incentives will remain, but tiering of the rates paid on such reserves might lead commercial banks to reallocate their assets from central bank reserves to other liquid assets (such as Treasury bills).

Large-scale tiered reserve remuneration might also affect decisions and incentives about the future use of QE, as the downside of central bank losses and their ensuing fiscal impacts when policy rates rise would be minimised. However, commercial banks might also become more reluctant to sell bonds to central banks (and concomitantly increase their reserves), which could make it more difficult for central banks to implement QE smoothly (McCauley and Pinter, 2024b).

References

Bank of Japan (2024), Changes in the Monetary Policy Framework, https://www.boj.or.jp/en/mopo/mpmdeci/mpr_2024/k240319a.pdf.

Buetzer, S. (2022), “Advancing the Monetary Policy Toolkit through Outright Transfers”, IMF Working Paper No. 2022/87, 6 May 2022. https://www.imf.org/en/Publications/WP/Issues/2022/05/06/Advancing-the-Monetary-Policy-Toolkit-through-Outright-Transfers-517641

Central Bank of Iceland (2018), Change in credit institutions’ minimum reserve requirements, 5 June 2018. https://cb.is/news-and-publications/article/2018-06-05-Change-in-credit-institutions-minimum-reserve-requirements

Central Bank of Iceland (2024), Monetary Policy Committee Statement on changes to credit institutions’ minimum reserve requirements, 4 April 2024. https://cb.is/news-and-publications/article/2024-04-04-Monetary-Policy-Committee-Statement-on-changes-to-credit-institutions-minimum-reserve-requirements-4-April-2024

Czech National Bank (2023), CNB ends remuneration of minimum reserves, 8 September 2023. https://www.cnb.cz/en/cnb-news/press-releases/CNB-ends-remuneration-of-minimum-reserves

Czech National Bank (2024), CNB increases minimum reserve requirement, 10 October 2024. https://www.cnb.cz/en/cnb-news/press-releases/CNB-increases-minimum-reserve-requirement

De Grauwe, P. and Y. Ji (2023), “Monetary policies with fewer subsidies for banks: A two-tier system of minimum reserve requirements”, VoxEU.org, 13 March 2023. https://cepr.org/voxeu/columns/monetary-policies-fewer-subsidies-banks-two-tier-system-minimum-reserve-requirements

Duffie, D. (2026). “The Payment System Puts a Floor on the Fed’s Balance Sheet.” BPEA Conference, Spring 2026. https://www.brookings.edu/wp-content/uploads/2026/03/3_Duffie_unembargoed.pdf

ECB (2023), ECB adjusts remuneration of minimum reserves, 27 July 2023. https://www.ecb.europa.eu/press/pr/date/2023/html/ecb.pr230727~7206e9aa48.en.html

McCauley, R. and J. Pinter (2024a), “Unremunerated reserves in the Eurosystem, part 2: Tax incidence and deposit relocation risks”, 16 January 2024. https://cepr.org/voxeu/columns/unremunerated-reserves-eurosystem-part-2-tax-incidence-and-deposit-relocation-risks

McCauley, R. and J. Pinter (2024b), “Unremunerated reserves in the Eurosystem, part 1: Heads I win, tails you lose”, 15 January 2024. https://cepr.org/voxeu/columns/unremunerated-reserves-eurosystem-part-1-heads-i-win-tails-you-lose

Riksbank (2024), The Riksdag has adopted Amendments to the Sveriges Riksbank Act, 18 December 2024. https://www.riksbank.se/en-gb/press-and-published/notices-and-press-releases/notices/2024/the-riksdag-has-adopted-amendments-to-the-sveriges-riksbank-act

Riksbank (2025), Riksbank decides on interest-free deposits for credit institutions, 11 June 2025. https://www.riksbank.se/en-gb/press-and-published/notices-and-press-releases/notices/2025/riksbank-decides-on-interest-free-deposits-for-credit-institutions

Riksbank (2026), The Riksbank has decided on interest-free deposits of almost SEK 35 billion, 8 May 2026. The Riksbank has decided on interest-free deposits of almost SEK 35 billion | Sveriges Riksbank

SNB (2023), SNB adjusts remuneration of sight deposits, 30 October 2023. https://www.snb.ch/en/publications/communication/press-releases/2023/pre_20231030

SNB (2024), SNB raises minimum reserve requirement for banks, 22 April 2024.
SNB raises minimum reserve requirement for banks

Tucker, P. (2022), “Quantitative easing, monetary policy implementation, and the public finances”, IFS Green Budget 2022 Chapter 7, 14 October 2022. Quantitative easing, monetary policy implementation, and the public finances | Institute for Fiscal Studies

Whelan, K. (2021), “Are Central Banks Storing Up a Future Fiscal Problem?”, Blog posted on 16 July 2021. https://karlwhelan.com/blog/?m=2021