Bundesbank TARGET2 balances
Within the framework of the single monetary policy in European monetary union (EMU), the Eurosystem provides euro-area commercial banks with central bank money in a decentralised manner, ie through its national central banks. TARGET2 balances arise from the cross-border distribution of central bank money within the decentralised structure of the Eurosystem. The size and distribution of the TARGET2 balances across the Eurosystem central banks are, however, irrelevant to their risk exposure from the provision of funds by the Eurosystem: TARGET2 balances do not pose specific risks to individual central banks.
At the end of 2010, the Deutsche Bundesbank recorded a positive TARGET2 balance totalling €325.5 billion. The evolution of this balance is closely related to the significant change in the refinancing behaviour of euro-area credit institutions induced by the financial crisis since 2007. Prior to the financial crisis, German banks, which accounted for more than 50% of the refinancing volume, were responsible for a very large share of the total Eurosystem refinancing operations. This enabled them to provide other euro-area banks with central bank money on a sizeable scale. The mutual loss of confidence evident on the European interbank market owing to the financial crisis since 2007 has led to a sharp decline in this intermediation function, which has, in turn, resulted in a shrinking share of monetary policy refinancing operations. In addition, as the German banking system became increasingly stable, there was an inflow of liquidity from the rest of the euro area, allowing German banks to reduce their refinancing operations with the Bundesbank. Conversely, since then banks domiciled in a number of other euro-area countries have been receiving larger amounts of central bank money through the Eurosystem. As part of its monetary refinancing operations, the Eurosystem has been supporting this change in demand behaviour through a series of operative measures. For instance, in the wake of the crisis, the provision of liquidity was expanded significantly – largely through the changeover to full allotment in the refinancing operations – in order to address the money market upheaval. Euro-area banks were supplied with sufficient liquidity provided they met the requirements for participating in the Eurosystem's collateralised operations.
These changes in the structure of refinancing operations are a major reason for the growing volume of TARGET2 claims on the part of the Bundesbank. However, this does not create any new specific risk not already contained in monetary policy refinancing operations, with respect to which, no matter which national central bank executes the Eurosystem refinancing operation, the risks are always borne by the Eurosystem as a whole. The individual national central bank’s share of the risk or profit is calculated in line with the ECB’s capital key. National TARGET2 balances are consequently booked as claims vis-à-vis the ECB. Moreover, a loss event occurs only if a Eurosystem counterparty defaults and the collateral deposited by said counterparty fails to yield the full value of the refinancing operations collateralised using that collateral despite the risk control measures applied by the Eurosystem.