No risk from TARGET if euro continues to exist in current form Guest contribution published in Die Welt
24.07.2018 | Johannes Beermann DE
As at the end of June 2018, the Bundesbank's TARGET2 balances have grown to €976 billion. The fairly steady rise since the beginning of 2015 was largely driven by the Eurosystem's asset purchases. For this reason, unlike the rapid rise in TARGET2 balances in 2011 and 2012, this growth is not necessarily indicative of mounting problems in the financial system or monetary union.
TARGET2 is the payment system used by Eurosystem central banks to quickly settle euro payments in real time. On average, about 340,000 payments with a total value of around €1.7 trillion flow through TARGET2 every day. The TARGET2 balance in the Bundesbank's balance sheet arises from commercial banks' cross-border transactions. In this context, it must be noted that, although the Eurosystem has a single currency, it has 19 national central banks. There is a common monetary policy that is nevertheless implemented in a decentralised manner. Commercial banks do not maintain direct business relations with the European Central Bank (ECB), but hold an account with a national central bank. Using cross-border credit transfers within the Eurosystem, the central bank liquidity created through monetary policy operations can be redistributed. If more funds flow into a country through this channel than out of it, that country’s national central bank builds up TARGET2 claims on the ECB as a counterpart to the increased deposits of credit institutions. Conversely, the national central bank of a country with net outflows of funds builds up TARGET2 liabilities to the ECB.
The Bundesbank’s TARGET2 claims increased substantially over the course of the financial crisis after 2008 and, in particular, due to the European sovereign debt crisis. Confidence in the solvency of individual banks and banking systems was majorly shaken during these crises, the money market’s ability to function was restricted, and growing sovereign debt as well as persistent current account deficits both contributed to the erosion of trust. A large portion of the central bank money created additionally was therefore held on accounts at the Bundesbank or in other countries, such as the Netherlands, Luxembourg or Finland. By the summer of 2012, the Bundesbank's TARGET2 claims reached an interim peak of around €750 billion. Following the ECB President’s “whatever it takes” statement and a gradual calming on the financial markets, the situation eased. The Bundesbank's TARGET2 claims fell by around €300 billion within a period of two years.
The more recent rise that began at the start of 2015 must be evaluated differently to the developments during the financial and sovereign debt crisis. Over the past few years, the asset purchases by the Eurosystem central banks were the main reason for the rise in TARGET2 balances. When a Eurosystem national central bank acquires an asset from a commercial bank that holds an account with another central bank, this has an impact on the TARGET2 positions of both central banks. For example, if the Banca d'Italia purchases an asset from a commercial bank based in the United Kingdom that holds its TARGET2 account with the Bundesbank, then it is this account that is credited. This transaction causes both the Bundesbank's TARGET2 claims and the Banca d’Italia's TARGET2 liabilities to increase. Many international banks from countries outside of the euro area are linked to the TARGET2 system via subsidiaries in Germany. As a considerable proportion of Eurosystem asset purchases are settled via such commercial banks, there is constant growth in credit institutions' deposits with the Bundesbank as well as the Bundesbank's TARGET2 claims on the ECB.
This, however, does not mean that the risks from the Bundesbank's TARGET2 claims also rose in this context. The Bundesbank's TARGET2 claims are claims on the ECB, not on an individual national central bank. As long as the Eurosystem continues to exist in its current form, the TARGET2 balances do not carry any risk. Additionally, in the extreme case that a country with a large volume of TARGET2 liabilities were to leave the monetary union, the volume of the Bundesbank's TARGET2 claims would be negligible for the associated risk. What would be significant in terms of offsetting TARGET2 liabilities in such an event is the ability and willingness of the withdrawing country's central bank to settle its existing liabilities to the ECB.
The Bundesbank believes that the Eurosystem will continue to exist in its current form. The aforementioned case of a country withdrawing is purely hypothetical. Generally, it also holds true that TARGET2 balances are a symptom – the causes for their growth lie outside of TARGET2. Further measures must target the causes of potential imbalances and be meaningful in and of themselves. In particular, such measures include the repayment of sovereign debt, structural reforms, as well as strengthening confidence in the solvency and resilience of banks. Over the medium and long term, it is likely that these measures would – to some extent as a side effect – help to reduce TARGET2 balances by building trust in euro area economic policy.
It is also expected that phasing out the asset purchase programme will lead to a decline in claims and liabilities within the Eurosystem, provided that, at the same time, central bank liquidity is reduced overall and the cross-border interbank market in the Eurosystem takes on a more significant role. Deeper integration of financial markets could speed up this process.