Government deposits

Government deposits held with the Eurosystem are one of the autonomous factors influencing liquidity conditions in the euro area. They include deposits held by national treasuries and local government entities, as well as deposits held by the European Stability Mechanism and the European Financial Stability Facility. Government deposits are reported under position L 5.1 in the Weekly financial statement of the Eurosystem. Deposits held by European institutions such as the European Commission and the Single Resolution Board are reported under item L 6 of the Eurosystem balance sheet, for statistical reasons.

Both the amount and the volatility of government deposits held with the Eurosystem vary across national central banks (NCBs). This is influenced by a number of factors, such as the different cash and debt management policies of national treasuries and other government account holders, as well as Eurosystem remuneration policies.

Since April 2024, government deposits and other non-monetary policy deposits held with the Eurosystem are remunerated at the euro short-term rate (€STR) minus a spread of 20 basis points. The rate also applies to overnight deposits held with NCBs under the Eurosystem reserve management services (ERMS) framework.

For euro area government deposits, the rate applies as a ceiling, i.e. euro area NCBs may apply a lower remuneration rate at their own discretion taking into account domestic considerations.

A limited number of exceptions from this uniform remuneration rate apply particularly for non-monetary policy deposits held in TARGET, namely for guarantee funds and prefunded accounts by financial market infrastructures (FMIs) domiciled in the European Economic Area (EEA), which are remunerated at €STR.

The decision on the remuneration framework follows a comprehensive review of the remuneration of the different types of non-monetary policy deposits. The new regime is bundled in a single legal act and creates a consistent set of rules, which is robust to alternative interest rate environments and minimises the risk of potential interference with the single monetary policy.

The new remuneration regime should maintain incentives for the holders of these deposits to reduce their cash holdings with the Eurosystem in a gradual and orderly manner. In the long term, it aims to ensure that non-monetary policy deposits held with the Eurosystem are stable over time at relatively low levels. This encourages market intermediation in line with the principle of an open market economy.

The Governing Council will continue to monitor money market developments and the evolution of these deposit holdings, and it stands ready to make further adjustments to the remuneration regime if necessary.

Prior to the introduction of a negative deposit facility rate in June 2014, government deposits were remunerated at a fixed rate of 0%, except for a small portion to which market rates applied. When the deposit facility rate was reduced to below zero, a cap was placed on the remuneration of government deposits by introducing a ceiling at the lower of the deposit facility rate or the relevant money market rates for as long as the deposit facility rate remained below zero. The decision gave national central banks discretion to apply a lower rate if deemed appropriate.

When lifting the deposit facility rate above zero in September 2022, the Governing Council decided to temporarily remove the remuneration ceiling of 0% until 30 April 2023 in order to preserve the effectiveness of monetary policy transmission and safeguard orderly market functioning. The remuneration of overnight government deposits thus continued to be capped at the lower of either the deposit facility rate or the €STR. This decision was intended to prevent an abrupt outflow of deposits into the market at a time when there were signs of a scarcity of collateral in some segments of the euro area repo markets.

On 6 February 2023 the Governing Council decided to adjust the remuneration of government deposits by setting a ceiling at the €STR minus 20 basis points, applicable from 1 May 2023. This measure aimed to provide incentives for a gradual and orderly reduction of such deposits in order to minimise the risk of adverse effects on market functioning and ensure the smooth transmission of monetary policy. This remuneration rate was confirmed by the most recent Governing Council decision of April 2024 and was extended to other categories of non-monetary policy deposits.