Kassazinssatz

What Is Kassazinssatz?

The Kassazinssatz, also known as the deposit facility rate, is an interest rate set by a Zentralbank (central bank) at which commercial banks can deposit their surplus Liquidität with the central bank overnight. It is a critical tool within a central bank's Geldpolitik framework, influencing the broader financial system by affecting the interest rates that commercial banks earn on their deposits and, consequently, the rates they offer to their customers. The Kassazinssatz essentially serves as the floor for very short-term money market rates, as banks would not lend to each other at a lower rate than they can earn by depositing funds at the central bank.
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History and Origin

The concept of a deposit facility rate evolved as central banks refined their monetary policy tools, particularly with the shift towards managing interbank liquidity more actively. While central banking has a long history, the formalization of facilities like the Kassazinssatz as explicit policy rates gained prominence in the late 20th and early 21st centuries. For instance, the European Central Bank (ECB), established in 1998, incorporated a deposit facility as one of its standing facilities, allowing Geschäftsbanken to make overnight deposits with the Eurosystem.

¹⁵, ¹⁶This mechanism became even more significant during periods of financial crisis and low inflation, when some central banks, including the ECB, lowered the Kassazinssatz into negative territory. This unconventional measure, first implemented by the Swedish Riksbank in 2009, and later by the ECB in 2014, aimed to encourage commercial banks to lend their excess reserves rather than hoarding them at the central bank, thereby stimulating economic activity. T¹³, ¹⁴he Federal Reserve in the United States, while not explicitly calling it a "deposit facility rate," has a similar mechanism in its "Interest on Reserve Balances" (IORB) rate, which influences the federal funds rate and broader market interest rates.

¹¹, ¹²## Key Takeaways

• The Kassazinssatz is the interest rate at which commercial banks can deposit excess funds overnight with a central bank.
• It is a key instrument of Geldpolitik, influencing short-term market rates and bank lending behavior.
• A higher Kassazinssatz encourages banks to hold reserves at the central bank, potentially tightening money market conditions.
• A lower or negative Kassazinssatz aims to incentivize banks to lend out their excess Liquidität into the economy.
• This rate serves as a de facto floor for overnight interbank lending rates.

Interpreting the Kassazinssatz

The Kassazinssatz is a direct signal of a central bank's monetary policy stance. When the Kassazinssatz is high, it indicates a tighter monetary policy, implying that the central bank aims to reduce the amount of money in circulation or to curb Inflation. Conversely, a low or negative Kassazinssatz suggests an accommodative policy, where the central bank seeks to stimulate economic growth and encourage Kreditvergabe.

Market participants closely watch changes in the Kassazinssatz because it impacts the Rendite banks earn on their risk-free overnight deposits, influencing their willingness to lend. A central bank might lower the Kassazinssatz to push down interbank lending rates, making it cheaper for banks to borrow from each other and ideally translating to lower lending rates for businesses and consumers.

Hypothetical Example

Consider a scenario where the central bank decides to lower the Kassazinssatz from 0.00% to -0.50%. Previously, Geschäftsbanken could deposit their surplus Einlagen with the central bank and receive no interest. With the new negative rate, for every €100 million a commercial bank deposits overnight, it would effectively pay €500,000 annually (0.50% of €100 million) to the central bank for holding those funds.

This creates a disincentive for banks to keep large amounts of money idle at the central bank. Instead, they are incentivized to deploy this liquidity elsewhere, such as by lending to other banks in the Geldmarkt, offering loans to businesses, or purchasing assets. The intention is to stimulate economic activity by encouraging banks to lend more freely and at lower rates, rather than incur charges for holding excess reserves.

Practical Applications

The Kassazinssatz plays a crucial role in central bank operations and has several practical applications in the financial world:

• Monetary Policy Transmission: It directly affects the cost of holding reserves for commercial banks, influencing their interbank lending rates and the overall transmission of Geldpolitik to the broader economy. When the rate is negative, it can push banks to increase lending to avoid charges on their excess Liquidität.
• Liqu¹⁰idity Management: For commercial banks, the Kassazinssatz provides a facility for managing their overnight liquidity, offering a secure, albeit sometimes costly, place to deposit surplus funds.
• Market Benchmarking: It serves as a benchmark for short-term interest rates in the Geldmarkt, as banks will not lend to each other below the rate they can earn (or pay less than they would pay) at the central bank's deposit facility.
• Economic Stimulus/Contraction: By adjusting the Kassazinssatz, central banks can either inject (through negative rates) or withdraw (through higher rates) incentives for commercial banks to circulate money, impacting Kreditvergabe and investment. Negative interest rate policies, as seen in some economies, aim to spur spending and investment by making it costly to hold cash.

Limitations and Criticisms

While an effective monetary policy tool, the Kassazinssatz, particularly when negative, has faced limitations and criticisms:

• Impact on Bank Profitability: Prolonged negative Kassazinssatz rates can compress banks' net interest margins, as they may be reluctant to pass on negative rates to retail depositors but still incur charges on their deposits with the central bank. This can strain bank profitability and potentially affect their lending capacity.
• Disi⁸, ⁹ncentive for Saving: For savers, especially those with large deposits, negative rates could theoretically lead to charges on their savings, diminishing the incentive to save and potentially encouraging consumption or investment in riskier assets.
• Fina⁷ncial Market Distortions: Some critics argue that negative rates can distort financial markets by encouraging excessive risk-taking in search of Rendite and by making it difficult to assess the true cost of capital.
• Limi⁶ted Effectiveness at Zero Lower Bound: There is debate on how effective negative rates are once rates are already very low, as psychological and operational barriers may prevent commercial banks from fully passing on these rates to retail customers. The Brooki⁵ngs Institution has also discussed potential unintended consequences of unconventional monetary policies, including negative interest rates.

Kassaz⁴inssatz vs. Leitzins

The Kassazinssatz (deposit facility rate) and the Leitzins (main refinancing operations rate) are both key interest rates set by central banks, but they serve different primary functions. The Kassazinssatz is the rate at which commercial banks can deposit their excess funds with the central bank overnight, effectively setting a floor for overnight interbank rates. It is generally the lowest of the central bank's policy rates. In contrast, the Leitzins is the rate at which commercial banks can borrow funds from the central bank, typically for a period of one week, against eligible collateral. This rate acts as a benchmark for other interest rates in the Finanzsystem and influences the cost of central bank funding for commercial banks. While the Kassazinssatz pertains to deposits by commercial banks, the Leitzins relates to borrowing by commercial banks, forming a corridor for money market rates.

FAQs

What happens if the Kassazinssatz is negative?

A negative Kassazinssatz means that commercial banks must pay the central bank to deposit their excess reserves overnight. This policy is implemented to discourage banks from holding idle cash and to incentivize them to lend money to businesses and individuals, thereby stimulating economic activity and combating Deflation.

How does the Kassazinssatz affect everyday consumers?

While not directly impacting consumer deposit or loan rates, changes in the Kassazinssatz influence the broader Geldmarkt rates. When it's lowered, it generally makes it cheaper for banks to lend, which can lead to lower interest rates on loans (like mortgages and business loans) and potentially lower returns on savings accounts.

Is the Kassazinssatz the same in all countries?

No, the Kassazinssatz (or its equivalent) is set independently by each country's or currency union's Zentralbank, based on their specific economic conditions and monetary policy objectives. For example, the European Central Bank sets the Kassazinssatz for the Eurozone, while the Federal Reserve in the United States manages its Interest on Reserve Balances.

Why d², ³o central banks use the Kassazinssatz?

Central banks use the Kassazinssatz as a tool to manage Liquidität in the financial system and steer short-term interest rates. By adjusting this rate, they can influence banks' lending behavior, thereby impacting overall economic activity, Inflation, and price stability.¹