Tiers of joy? Reserve tiering and bank behavior in a negative-rate environment

Negative interest rate regimes typically involve reserve tiering to exempt a portion of bank reserves from negative rates. We study the effects on bank behavior of a large and unanticipated change in reserve tiering by the Swiss National Bank that generated substantial variation across banks and was not related to other events. We find a sizable reallocation of liquidity and deposits within the banking system. Higher exemptions reduce the pass-through of negative rates to deposit rates, especially at retail banks with limited access to the interbank market. Effects on lending are moderate and suggest that higher profitability lessens pressure to reach for yield. Our results are informative about the transmission channels of monetary policy through the banking sector more broadly. We discuss how effects of reserve tiering may differ from effects of changes in interest rates, emphasizing that reserve tiering affects the economy through a narrower set of channels.