Having said that, I am fully aware of the possibility that the negative interest rates on excess liquidity holdings may affect the profitability of bank intermediation in the long run (since they are primarily funded by their clients’ deposits). I hence strongly advocated the introduction of the two-tier system in 2019, which aims to exempt part of credit institutions' excess liquidity holdings from the cost of the negative deposit facility rate. This has been a success in limiting the negative side effects on bank intermediation of low-for-long interest rates, thereby preserving the transmission of monetary policy. The exemption volume is determined as a multiple of banks' minimum reserve requirements, which is currently set at six. When the two-tier system was introduced, in October 2019, total excess liquidity was just above € trillion. As a result of the ECB response to the Covid pandemic, this has now jumped to € trillion, an amount well above the level of reserves necessary to steer market rates towards the deposit facility rate. This FREL - floor required excess liquidity - is currently estimated at about € trillion. Consequently, I would support a more rule-based approach to set the level of the multiplier, as a function of the change in excess liquidity net of both necessary (FREL) and borrowed reserves (TLTROs). Much more than subsidising liquidity provision beyond exceptional circumstances, a well calibrated tiering system belongs to the normal tools of monetary policy as shown by other jurisdictions. Let me conclude.
François Villeroy de Galhau: Monetary strategy and inflation in Europe - what’s new? Speech by Mr François Villeroy de Galhau, Governor of the Bank of France, at the SUERF Conference, New York City, 12 October 2021. * * * Ladies and Gentlemen, I am very happy to join you today for this discussion on "EU and US Perspectives". Exactly one year after my previous intervention in this Forum, I definitely see a change for the better in the economic climate in Europe. Europe is now the most vaccinated continent in the world. Economic growth in the euro area has so far been stronger than expected and according to our latest forecasts, real GDP is expected to exceed its pre-Covid level by the end of this year. If anything, we can perhaps say that uncertainty has shifted a little bit from the growth outlook to the inflation outlook, but I will come back to this point later. My speech today will address three interconnected issues: I. What are the key changes following the ECB strategy review? II. Where do we stand on inflation? III. Perspectives on the ECB's monetary policy up to and after the end of the Covid crisis. I. The ECB’s monetary policy framework The unanimous adoption in July of the new monetary policy strategy was an important achievement for the Eurosystem. Let me pay tribute to Christine Lagarde, and sum up our review in three key messages: 1.