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TARGET2 Balances in the Eurosystem

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TARGET2 Balances in the Eurosystem Deutsche Bundesbank Annual Report 2011 48 TARGET2 balances in the Eurosystem The TARGET2 balances that have arisen at timately, the TARGET2 surpluses and defi cits some Eurosystem national central banks result from disequilibria in the balance of (NCBs) since the onset of the fi nancial crisis payments of several euro-area countries. have sparked a broad public debate. The This may entail current account defi cits or discussion has mainly focused on the causes capital exports by the private sector, which of these balances and the risks associated are then refl ected in liquidity outfl ows from with them. these countries. TARGET2 is a payment system that enables The chart on page 49 gives an overview of the speedy and fi nal settlement of national the level of TARGET2 claims and liabilities at and cross-border payments in central bank the end of 2009, 2010 and 2011. Alongside money.1 An average of around 350,000 Germany (€463 billion on 31 December payments with a value of just under €2½ 2011), the Netherlands, Luxembourg and trillion are processed using TARGET2 each Finland all showed net claims in the most working day,2 a fi gure which is broadly recent balance sheet. These claims in- equivalent to the size of Germany’s GDP. creased strongly in the course of 2011, par- These payment transactions can take a ticularly in the second half of the year as wide variety of forms, such as payment for the fi nancial and sovereign debt crisis grew a goods delivery, the purchase or sale of a more acute. Concurrently, Spain and Italy security, the granting or repayment of a amassed sizeable liabilities, while the defi cit loan or the depositing of funds at a bank, recorded by the Irish central bank, for ex- among many others. Whenever the banks ample, declined.3 Viewed in relation to of a given country are net recipients of GDP,4 Luxembourg (around 260%), Finland central bank money, the national central (35%) and the Netherlands (25%) posted bank (NCB) in question records a positive the largest positive balances, ahead of Ger- TARGET2 balance, as is the case with the many at 18%. The largest negative balances Bundesbank. This represents a claim not on were recorded by Ireland (77%), Greece another NCB but rather on the European (48%) and Cyprus (45%). Central Bank (ECB), which acts as a clearing house that settles transactions among Banking systems that receive infl ows of NCBs. central bank money through TARGET2 have a lesser need to seek funding from their do- Commencing in 2007, larger positive and mestic central bank. Institutions in Germany negative TARGET2 balances have accumu- have therefore steadily reduced the volume lated within the Eurosystem as a result of of their refi nancing from the Bundesbank the fi nancial crisis. Since then, the redistri- bution of liquidity among credit institutions 1 The ECB publishes detailed information on TARGET2 via the money market has ceased to oper- every year in its TARGET Annual Report, the most re- ate normally owing to mutual mistrust cent of which can be downloaded from http://www. ecb.int/pub/pdf/other/targetar2010en.pdf. among banks. Another factor is that whole- 2 TARGET2 stands for Trans European Automated sale funding on the fi nancial markets has Real-time Gross Settlement Express Transfer System. See also the chapter “Cashless payments and securities become harder and dearer for the banks. settlement” in this Annual Report on pp 105-110. Some institutions have effectively been cut 3 The positive balance posted by the ECB at the end of 2011 is largely attributable to claims on the NCBs aris- off from the market and so are reliant on ing from tender operations denominated in US dollars. liquidity assistance from central banks. Ul- 4 Source: European Commission. Deutsche Bundesbank Annual Report 2011 49 TARGET2 balances in the Eurosystem Year-end data € bn 2009 2010 2011 + 400 + 300 + 200 + 100 0 – 100 – 200 DE NL LU FI ECB EE MT SI CY SK AT BE PT FR GR IE ES IT Deutsche Bundesbank and now actually have a large credit bal- With regard to the risks attached to the Eu- ance on their Bundesbank account. Conse- rosystem’s business activities, the debate quently, they are parking excess infl ows of surrounding TARGET2 balances is in danger central bank money in the Eurosystem’s de- of diverting attention from the real chal- posit facility or are investing them in Eu- lenges. No steps to directly limit TARGET2 rosystem liquidity-absorbing operations. balances are envisaged at present. More- This has the effect of extending the Bundes- over, any measures that tend to promote a bank’s balance sheet. A sale of assets, for segmentation of the money market or re- example of reserve assets, is not necessary strict the free movement of capital run to compensate for the infl ux of central bank counter to the principles upon which mon- money. Nevertheless, a dysfunctional inter- etary union and the single European market bank market featuring institutions that are rest. heavily dependent on central bank fi nan- cing is not a desirable situation. Risks emanate from the operations through which central bank liquidity is created. In TARGET2 cannot be used to create liquidity. order to participate in Eurosystem refi nan- Instead, the sole purpose of TARGET2 is to cing operations, the counterparty has to be transfer liquidity (ie central bank money) both solvent and able to post adequate col- that is already at the disposal of the partici- lateral. Losses may potentially arise if the pating banks. Providing liquidity is one of counterparty defaults and the collateral the key tasks of any central bank. The exact provided by the latter concurrently proves manner in which this is achieved in the euro insuffi cient upon realisation. These losses area is decided by the Governing Council of are customarily borne jointly, dependent on the ECB as part of its monetary policy man- a decision of the ECB Governing Council, by date. Banks are primarily provided with cen- the partner central banks in line with their tral bank money through refi nancing oper- capital share in the ECB. Such risk-sharing is ations, but also inter alia by national central explicitly ruled out in the case of certain banks acquiring securities portfolios and kinds of transactions. These include, for ex- conducting operations on their own re- ample, the provision of emergency liquidity sponsibility. assistance (ELA). A new provision was intro- duced by the Governing Council in Decem- Deutsche Bundesbank Annual Report 2011 50 ber 2011 allowing national central banks to balance sheet risks could occur if a member accept credit claims as collateral under cer- state were to exit monetary union. Such a tain conditions. In this case, too, risk- case is unlikely and not provided for in the sharing is ruled out and any potential losses terms of the Treaty on the Functioning of are to be borne solely by the respective na- the European Union. However, should a tional central bank. country with TARGET2 liabilities opt to leave the euro area, any claims the ECB might The Eurosystem’s exposure to risk increased have on the national central bank of that signifi cantly during the fi nancial crisis fol- country would initially persist in the same lowing its assumption of more and more amount. If the exiting central bank proved banking intermediation functions and, in unable to repay its liabilities despite loss- particular, the decision to dilute the collat- offsetting within the Eurosystem and the eral standards for monetary policy oper- collateral available, it would be necessary to ations, the build-up of securities portfolios devise a solution for the outstanding for monetary policy reasons and the grant- amount. Only if and when a residual claim ing of ELA by individual countries. Ultim- were deemed unrecoverable would the ECB ately, monetary policymakers always have actually recognise a loss by virtue of writing to tread a careful path between taking it off as a bad debt. Compensation for any crisis-related measures and seeking to miti- losses incurred by the ECB would be de- gate the risks for central banks. It is not the cided by the NCBs in their capacity as share- task of an independent monetary policy to holders on the ECB Governing Council, redistribute the solvency risks of banking based on a capital majority. Any participa- systems, or indeed of sovereigns, among tion in the ECB’s loss would have the effect taxpayers across the euro area. Such risk- of reducing the profi ts of the NCBs and, for taking and decisions pertaining to risk redis- example in the case of Germany, reduce the tribution fall within the remit of fi scal poli- Bundesbank’s TARGET2 claims on the ECB. cymakers. In reality, the Bundesbank expects monetary union to persist in its present form. The fi nancial risks that have arisen from the expanded refi nancing operations and the The tensions in the fi nancial markets will purchase of covered bonds and, more espe- abate once confi dence in the euro-area cially, of government bonds are also mir- banking sector as a whole and in individual rored in the Bundesbank’s higher risk provi- banks has been restored and those banks sioning. Furthermore, the Eurosystem’s that are currently experiencing major liquid- short-term non-standard liquidity policy ity problems have been restructured or dis- measures to contain the acute conse- appear from the market. The recapitalisa- quences of the fi nancial crisis should not tion of solvent banks, if necessary through delay, let alone substitute, the necessary ad- government assistance, and the winding-up justment processes in individual countries.
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