DP17337 Money Markets and Bank Lending: Evidence from the Tiering Adoption
Exploiting the introduction of the ECB’s tiering system for remunerating excess reserve holdings, we document the importance of the access to the money market for bank lending. We show that the two-tier system produced positive wealth effects for banks with excess reserves and encouraged a reallocation of liquidity toward banks with unused exemptions. This ultimately decreased the fragmentation in the money market and enhanced the transmission of monetary policy. Improved money market access incentivizes banks with unused allowances to extend more credit than other banks, including banks with excess liquidity whose valuations increased the most.