Negative interest on excess reserves is an instrument of unconventional monetary policy applied by central banks to encourage lending by making it costly for commercial banks to hold their excess reserves at central banks so they will lend more readily to the private sector.

Background:

1. To battle the global financial crisis triggered by the collapse of Lehman Brothers in 2008, many central banks cut interest rates near zero.
2. A decade later, interest rates remain low in most countries due to subdued economic growth.
3. With little room to cut rates further, some major central banks have resorted to unconventional policy measures, including a negative rate policy.
4. The Euro area, Switzerland, Denmark, Sweden and Japan have allowed rates to fall slightly below zero.