TARGET2 – Balance
TARGET2 is a payment system that enables the speedy and final settlement of national and cross-border payments in central bank money. An average of around 340,000 payments with a value of about € 1.7 trillion are processed using TARGET2 each working day. During a whole year, TARGET2 settles about 90 million payments with a value of about € 450 trillion. These payment transactions can take a wide variety of forms, such as payment for a goods delivery, the purchase or sale of a security, the granting or repayment of a loan or the depositing of funds at a bank, among many others.
In addition to payments between credit institutions and from other systems (eg securities settlement systems), payments undertaken as part of the Eurosystem’s open market operations are settled via TARGET2.
If, for example, foreign funds are transferred to a bank that participates in TARGET2 via the Bundesbank, this results in a liability of the Bundesbank to this bank (such as in the form of a credit to this amount on the bank‘s current account). In return, the transaction generates a Bundesbank claim for the same sum on the sending central bank. This central bank then in turn debits the account of the originating commercial bank. This requires the originating commercial bank to have a sufficient credit balance in central bank money. Central bank credit balances are primarily provided by the Eurosystem’s monetary policy refinancing operations.
The resulting claims and liabilities generated at the national central banks by the multiple transactions over the course of a day normally do not fully balance out. Under the terms of a Eurosystem agreement, the outstanding claims and liabilities of all the national central banks participating in TARGET2 are transferred to the ECB at the end of the business day, where they are netted out. The resulting TARGET2 (net) balances hence arise from the cross-border distribution of central bank money within the Eurosystem’s decentralized structure.
The TARGET2 balance in the Bundesbank’s balance sheet is therefore mainly attributable to cross-border transactions which involve banks that participate in TARGET2 via the Bundesbank (several banks from other EU countries participate in TARGET2 via the Bundesbank in cases where their own national central banks do not participate in TARGET2). On the one hand, it is affected by credit institutions’ operations on the money and capital markets and, on the other, by transactions carried out by the non-banking sector, which generates payments via the banking system.