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ECB studying tiered deposit rate to alleviate banks' plight: sources

FRANKFURT (Reuters) - The European Central Bank is studying options to lower the charge that banks pay on some of their excess cash as a possible way to offset the side-effects of its ultra-easy policy, two sources told Reuters.

FILE PHOTO: The headquarters of the European Central Bank (ECB) are illuminated with a giant euro sign at the start of the "Luminale, light and building" event in Frankfurt, Germany, March 12, 2016. EUTERS/Kai Pfaffenbach/File Photo

No policy proposal has been made on the matter but the objective of the move would be to return some of more than 7 billion euros ($7.90 billion) a year the ECB collects in interest from banks, one of the sources said.

Negative interest rates effectively mean banks pay the ECB to park their excess liquidity safely with it overnight.

A so-called tiered deposit rate would mean banks are exempted in part from paying the ECB’s 0.40 percent annual charge on their excess reserves, boosting their profits as they struggle with an unexpected growth slowdown.

A problem with a tiered rate is that it would signal that rates are going to stay low for a very long time, in potential conflict with the ECB’s forward guidance, which sees rates at record lows only until next year, one of the sources added.

On the other hand, movements in financial markets suggest investors have already priced out a deposit rate hike for almost another two years.

The sources said work is still at the staff level and has not yet reached the policymaking Governing Council.

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An ECB spokesman declined to comment.

The ECB’s Governing Council discussed the merits of a tiered deposit rate at its March 2016 meeting but ultimately decided against it.

The negative deposit rate was introduced by the ECB in 2014 to stave off the threat of deflation but is proving a burden for cash-rich banks in countries such as Germany and France.

With the economy slowing, the ECB earlier this month pushed back the timing of its first post-crisis rate hike to next year and is ready to delay it again if needed, its President Mario Draghi said on Wednesday.

Excess cash sloshing around the euro zone has ballooned as a result of the ECB’s 2.6 trillion euro ($2.93 trillion) bond-buying program.

Various forms of tiered rates have been introduced in Japan, Denmark, Sweden and Switzerland and the sources said ECB staff had been working on a number of options for years.

In a speech earlier on Wednesday, Draghi said the ECB should if necessary “reflect on possible measures that can preserve the favorable implications of negative rates for the economy, while mitigating the side-effects, if any”.

“That said, low bank profitability is not an inevitable consequence of negative rates,” he added.

Reporting by Balazs Koranyi, Frank Siebelt and Francesco Canepa; Editing by Catherine Evans