Minimum reserve requirement
The minimum reserve requirement applies to all euro area credit institutions, which are thus required to hold a certain amount of minimum reserves with the national central bank of their home country. Institutions' holdings of minimum reserves are remunerated at the same rate as that paid by counterparties for central bank money in the main refinancing operations. The minimum reserve requirement is based on the credit institution's stock of deposits.
The minimum reserve requirement serves to stabilise short-term money market rates and, where necessary, increase credit institutions' demand for central bank funding. The stabilising effect of the minimum reserves obtains because compliance is based on the average reserve holdings for maintenance periods of about one month. For this reason, random fluctuations in the demand for central bank money do not usually have a strong effect on short-term money market rates.
Market operations
The Eurosystem engages in market operations in order to regulate the amount of central bank money available in the financial system. All lending to credit institutions must be backed by adequate and specifically defined collateral. This is intended to prevent loan losses in the implementation of Eurosystem monetary policy. Market operations can be divided into four categories: main refinancing operations, longer-term refinancing operations, fine-tuning operations and structural operations.
The Eurosystem uses weekly main refinancing operations to signal the stance of interest rate policy. Main refinancing operations are conducted with a maturity of one week, either as fixed rate or variable rate tenders. In fixed-rate operations, the price of central bank money is fixed in advance in accord with the monetary policy stance. In variable rate operations, the monetary policy stance is expressed by the minimum bid rate, which serves as the lower limit for the price of central bank money.
Longer-term refinancing operations – with a maturity of three months – are conducted as monthly tenders. These operations serve to meet the longer-term funding needs of the financial sector and are not normally intended to influence the level of interest rates.
In addition to the regular weekly and monthly refinancing operations, the ECB may also conduct fine-tuning operations in response to unexpected fluctuations in the banking system's need for funding. In addition to providing additional funding, fine-tuning operations may also be used for accepting fixed-term deposits from credit institutions. Most of the fine-tuning operations are conducted during the last few days of the reserve maintenance periods.
Where needed, the Eurosystem can regulate credit institutions' need for funding by conducting longer-term structural operations. Issuance of debt instruments or securities sales and purchases may be used for this purpose.
Standing facilities
The standing facilities of the Eurosystem enable monetary policy counterparties to even out, at their own discretion, daily fluctuations in funding needs by making overnight deposits or obtaining overnight liquidity against eligible assets. Because of random fluctuations in balance sheet items that are independent of monetary policy, it is not possible in the market operations to supply the exact amount of money to meet the aggregate minimum reserve requirement. Moreover, the daily demand for central bank money depends on the ability of money markets to appropriately allocate the amount of liquidity among the banks.
The deposit rate is always lower, and the lending rate always higher, than the interest rate on the main refinancing operations. The interest rates of the standing facilities form a corridor – a floor and a ceiling – for the interbank overnight interest rate and hence limiting its fluctuations.