TARGET2-Securities operation center ©Nils Thies

Coronavirus crisis pushes TARGET2 balance above €1 trillion

The Bundesbank’s TARGET2 balance has been growing again significantly since March. It exceeded the €1 trillion mark in July. This renewed increase over the past few months can largely be put down to the expansion of the Eurosystem’s purchase programmes in response to the COVID-19 pandemic. 

March 2020 saw the ECB Governing Council further increase purchases under the asset purchase programme (APP) and adopt a new programme, the pandemic emergency purchase programme (PEPP). These measures are the reason why the volumes of the Eurosystem’s monthly monetary policy net purchases are higher than ever before. The asset purchases have cross-border effects and these generally cause TARGET2 balances to increase. 

Other reasons for the current increase

However, Bundesbank experts believe that additional factors might have played a part in the current increase as well. For one thing, there have been other monetary policy operations, including a new series of targeted longer-term refinancing operations (TLTROs), which have created additional liquidity in recent months that has boosted excess liquidity in the system and might also have pushed up the TARGET2 balances through second-round effects. It is not always possible to differentiate between individual factors in the short term; over the medium term, monetary policy and the market environment impact significantly on the level of TARGET2 balances.

Balances likely to shrink when asset purchase programmes come to an end

This backdrop would suggest that as long as the Eurosystem continues to purchase assets, the Bundesbank’s TARGET2 balance will remain high. It is only expected to shrink significantly when the excess liquidity created by the non-standard monetary policy measures within the Eurosystem subsides again and the cross-border interbank market in the euro area plays a more significant role. 

How the TARGET2 system works

TARGET2 is the payment system used by Eurosystem central banks to quickly settle payments in real time. It enables both national and cross-border payments to be settled quickly and cheaply in central bank money. Transactions processed using TARGET2 can take a wide variety of forms, such as payment for a goods delivery, purchase of a security, depositing of funds at a bank or repayment of a loan. Payments within Germany are settled by the Bundesbank alone. Cross-border transactions are carried out by the respective central banks. The high number of payments made each day means that Eurosystem national central banks (NCBs) need to book a large volume of mutual claims and liabilities in TARGET2. At the end of a business day, these claims and liabilities are automatically cleared in a settlement system and transferred to the European Central Bank, leaving a single NCB liability to, or claim on, the ECB – the TARGET2 balance.

Liability issues

The Bundesbank’s TARGET2 balances would only ever pose a risk if a country with a negative balance were to leave the euro area. In this hypothetical scenario, the ECB’s claim on the national central bank in question would continue to exist in full. Only if this claim were not settled in its entirety would a value adjustment have to be made, which might ultimately result in the ECB recording a loss. The volume of German TARGET2 claims held by the Bundesbank on the ECB would be irrelevant in this case, meaning that both central banks with a TARGET2 claim on the ECB and those with a TARGET2 liability would bear the remaining loss proportionally.