|This article almost exclusively relies on scientific work of a single economist, Hans-Werner Sinn. (January 2014)|
TARGET2 is an interbank payment system for the real-time processing of cross-border transfers throughout the European Union. TARGET2 replaced TARGET (Trans-European Automated Real-time Gross Settlement Express Transfer System) in November 2007.
TARGET2 is the real-time gross settlement (RTGS) system owned and operated by the Eurosystem. TARGET2 is the second generation of TARGET. Payment transactions are settled one by one on a continuous basis in central bank money with immediate finality. There is no upper or lower limit on the value of payments. TARGET2 mainly settles operations of monetary policy and money market operations. TARGET2 has to be used for all payments involving the Eurosystem, as well as for the settlement of operations of all large-value net settlement systems and securities settlement systems handling the euro. TARGET2 is operated on a single technical platform. The business relationships are established between the TARGET2 users and their National Central Bank. In terms of the value processed, TARGET2 is one of the largest payment systems in the world (See TARGET Annual Report 2012).
A Dutch importer, for example, might place an order with a Spanish company. Payments to and from the accounts of the buyer and seller are channeled via central banks, so the Spanish exporter's bank gets a credit with the Banco de España, which in turn has a claim on the ECB. The Dutch importer's bank owes its local central bank, leaving De Nederlandsche Bank with a debit at the ECB.
Why payment systems at central banks? As issuers of money, central banks have always had a keen interest in the smooth functioning of the national payment system and the way it affects the economy. Central banks have taken on a prominent role in the pursuit of maintaining trust in the currency and ensuring its smooth circulation. There is a strong motivation for central bank involvement in payment, clearing and settlement issues. Modern economies are dependent on the safe and efficient flow of transactions. The smooth functioning of payment, clearing and settlement systems increases users’ confidence in those systems and, ultimately, public confidence in the currency. The functioning of these systems also has an impact on the stability of financial institutions and markets, and may affect systemic stability. Such systems are also essential for the implementation of monetary policy. Payment, clearing and settlement systems are important for financial markets and the functioning of the economy as a whole, and are therefore important for the welfare of society. Central banks can also have an operational role in the processing of retail payments. In some countries, the central bank also operates securities settlement infrastructure. Acting in an operational capacity is one way for the central bank to ensure that the system or service in question meets the safety and efficiency standards it has set. A central bank will usually co-operate closely with the banking system when developing the facilities it operates. TARGET was developed by the Eurosystem, the central banking system of the euro area. It offers a premium payment service across national borders in the European Union (EU).
Main objectives of TARGET2: Supporting the implementation of the Eurosystem's monetary policy and the functioning of the euro money market; Minimising systemic risk in the payments market; Increasing the efficiency of cross-border payments in euro. By meeting these objectives, TARGET contributes to the integration and stability of the euro area money market.
Migration to TARGET2
Since the establishment of the European Economic Community in 1958 there has been a progressive movement towards a more integrated European financial market. This movement has been marked by several events: In the field of payments, the most visible were the launch of the euro in 1999 and the cash changeover in the euro area countries in 2002. The establishment of the large-value central bank payment system TARGET was less visible, but also of great importance. It formed an integral part of the introduction of the euro and facilitated the rapid integration of the euro area money market. A unique feature of TARGET2 is the fact that its payment services in euro are available across a geographical area which is larger than the euro area. National central banks which have not yet adopted the euro also have the option to participate in TARGET2 to facilitate the settlement of transactions in euro. When new Member States join the euro area the participation in TARGET2 becomes mandatory. The use of TARGET2 is mandatory for the settlement of any euro operations involving the Eurosystem. 24 central banks of the EU and their respective user communities are participating in, or connected to, TARGET2: The 20 euro area central banks (including the ECB) and four central banks from non-euro area countries: Bulgaria, Denmark, Poland and Romania.
The implementation of TARGET2 was based on a decision of the ECB Council of Autumn 2002. The Single Shared platform (SSP) is operated by three providing central banks: France, (Banque de France), Germany (Deutsche Bundesbank) and Italy (Banca d'Italia). TARGET2 started operations on 19 November 2007, when the first group of countries (Austria, Cyprus, Germany, Latvia, Lithuania, Luxembourg, Malta and Slovenia) migrated to the SSP. This first migration wave was successful and confirmed the reliability of the TARGET2 platform. After this initial migration, TARGET2 already settled around 50% of overall traffic in terms of volume and 30% in terms of value. On 18 February 2008 the second migration group (Belgium, Finland, France, Ireland, the Netherlands, Portugal and Spain) successfully migrated to TARGET2. On 19 May 2008 the final group migrated to TARGET2: Denmark, Estonia, Greece, Italy, Poland and the ECB. The six-month migration process was very smooth and did not cause any operational disruptions. Slovakia joined TARGET2 on 1 January 2009. Bulgaria joined in February 2010. Romania joined on 4 July 2011.
Transaction prices for TARGET2
There are two parallel schemes:
- Recurring fixed charges and a fixed transaction fee
- Monthly fixed charge: €100.00
- Single transaction price: €0.80
- Recurring fixed charge and a variable transaction fee based on number of transactions
- Monthly fixed charge: €1,250.00
- Variable transaction price: volume-based between €0.60 and €0.125
Relation to European sovereign debt crisis and criticism
The main subjects of criticism are the unlimited credit facilities made available since the establishment of the TARGET system by the national central banks of the Eurosystem on the one hand and by the ECB on the other.
The issue of the increasing Target balances was brought to public attention for the first time in early 2011 by Hans-Werner Sinn, president of the Munich Ifo Institute. In an article in ‘Wirtschaftswoche’ he drew attention to the enormous increase in Target claims held by Germany's Bundesbank, from 5 billion at the end of 2006 to 326 billion at the end of 2010, and to the attendant liability risk. In the German daily Süddeutsche Zeitung he put the entire volume of the Target liabilities of Greece, Ireland, Portugal, and Spain at 340 billion euros at the end of February 2011. Moreover, he pointed out that if these countries should exit the Eurozone and declare insolvency, Germany's liability risk would amount to 33% of that sum, or 114 billion euros, relating these sums to the other rescue facilities of euro countries and the International Monetary Fund. Before he made them public, Target deficits or surpluses were not explicitly itemised, being usually buried in obscure positions of central bank balance sheets.
Shortly thereafter Sinn interpreted the Target balances for the first time within the context of current account deficits, international private capital movements and the international shifting of the refinancing credit that the national central banks of the Eurosystem grant to the commercial banks in their jurisdiction. He proved that the ECB system compensated the interruption and reversal in capital flows triggered by the financial crisis by shifting refinancing credit among national central banks. The increase in Target liabilities is a direct measure of net payment orders across borders, i.e. of the portion of the current account deficit that is not counterbalanced by capital imports, or, equivalently, the sum of the current account deficit and net capital exports. Indirectly, they also measure a country's amount of central bank money created and lent out beyond what is needed for domestic circulation. Since every country needs a relatively steady amount of central bank money for its domestic transactions, payment orders to other countries, which reduce the domestic stock of money, must be offset by a continuous issuing of new refinancing credit, i.e. the creation of new central bank money. Similarly, the increase in money balances in the country whose central bank honours the payment orders reduces the demand for fresh refinancing credit. Hence, a country's Target liabilities also indicate the extent to which its central bank has replaced the capital markets to finance its current account deficit, as well as any possible capital flight, by creating new central bank money through corresponding refinancing credit. Sinn illustrated that from an economic perspective, Target credit and formal rescue facilities serve the same purpose and involve similar liability risks. Sinn's presentation on 19 May 2011 at the Munich Economic Summit motivated an op-ed column in the Financial Times. They reconstructed the data on the basis of the balance sheets of the Eurosystem's national central banks and the balance-sheet statistics of the International Monetary Fund.
Later, in June 2011, Hans-Werner Sinn and Timo Wollmershaeuser compiled the first panel database of the Eurozone's Target balances. The authors point out that the additional creation of money by the central banks of the crisis-stricken countries was provided by a lowering of the standards for the collateral that commercial banks have to provide to their national central banks to obtain refinancing credit. Furthermore, they showed that the commercial banks of the Eurozone's core countries used the incoming liquidity to reduce the refinancing credit they drew from their national central bank, even lending the surplus liquidity to this central bank, which implies that the Target balances indirectly also measure the reallocation of refinancing credit among the countries of the Eurozone. The authors showed that the national central banks of the northern countries became net debtors to their own banking systems. Sinn and Wollmershaeuser argue that the euro crisis is a balance-of-payments crisis, which in its substance is similar to the Bretton Woods crisis. Moreover, they show the extent to which Target credit financed current account deficits or capital flight in Greece, Ireland, Portugal, Spain and Italy. They also show that the current account deficits of Greece and Portugal were financed for years by refinancing credits of their national central banks and the concomitant Target credit. They document as well the Irish capital flight and the capital flight from Spain and Italy, which began in earnest in summer 2011. Following Sinn, the authors compare the Target balances of the Eurosystem with the corresponding balances in the US settlement system (Interdistrict Settlement Account) and point out that US balances relative to US GDP have decreased thanks to a regularly performed settlement procedure in which ownership shares in a common Fed clearing portfolio are reallocated among the various District Feds comprising the US Federal Reserve System. They advocate the establishment of a similar system in Europe to end the ECB's role as a provider of international public credit that undercuts private market conditions. Hans-Werner Sinn addressed the Target balances issue again in a special edition of 'ifo Schnelldienst' and made it the main topic of his book ‘Die Target-Falle‘ ("The Target Trap"), published in early October 2012.
A number of economists took a stand on the issue of the Target balances in a publication of the Ifo Institute, confirming Sinn's analysis. Financial commentator David Marsh, writing in early 2012, noted that TARGET2 provides "automatic central bank funding for EMU countries suffering capital outflows provided through it" and that the balances would "have to be shared out by central banks throughout the Eurosystem ... if EMU fragments into its constituent parts. So the pressure on Germany is to keep the balances growing, in order to avoid crystallization of losses that would be hugely damaging not just to Berlin but also to central banks and governments in Paris and Rome".
The official reactions to Sinn's research findings were mixed. At first, in February and March 2011, the Bundesbank downplayed the Target balances as an irrelevant statistical position. However, in early 2012, Bundesbank chief Jens Weidmann wrote a letter to ECB head Mario Draghi on the subject which "found its way into the columns of the conservative Frankfurter Allgemeine Zeitung newspaper[. It] appeared to suggest more secure collateralisation for the overall ECB credits to weaker EMU central banks, which now amount to more than €800 billion under the ECB's TARGET2 electronic payment system," Marsh noted in a subsequent column.
Jens Ulbrich and Alexander Lipponer (economists at the Bundesbank) justified the policy of the ECB during the European balance-of-payments crisis as follows: In the crisis, the Eurosystem consciously assumed a larger intermediation function in view of the massive disruptions in the interbank market by extending its liquidity control instruments. With this greater role in the provision of central bank money – essentially by changing to a full allotment procedure in refinancing operations and the extension of longer-term refinancing operations – the total volume of refinancing credits provided has increased (temporarily even markedly). At the same time, the quality requirements for the underlying collateral were reduced in the crisis. The higher risk was accepted to maintain the functioning of the financial system under more difficult conditions.
The ifo Institute’s regularly updated "Exposure level indicator" (‘Haftungspegel‘) shows Germany’s potential financial burden should the crisis-stricken euro countries exit the currency union and declare insolvency. In another development, the Institute of Empirical Economic Research at the University of Osnabrueck collects and publishes Target2 data from all euro countries on the basis of the balance sheets of each central bank.
Nevertheless, there are also some economists who contradict some points of Sinn's analysis. Paul De Grauwe and Yuemei Ji argue that Germany's and other countries’ Target claims could be made void, without suffering any losses, since that the value of the central bank money, being "fiat money", is independent of a central bank's assets. Sinn, in his rejoinder, showed that the Target balances represent the shift of refinancing credit to the crisis-stricken countries, representing thus the claim on the interest returns from these countries. Eliminating the Target balances would thus entail a real loss of resources amounting to the present value of this interest income, which is reflected exactly by the amount of Target claims. This loss would result in a smaller transfer of Bundesbank's revenues to the German budget and, should the situation arise, in the necessity to recapitalise the Bundesbank through increased taxation. Sinn uses the same reasoning in his book ‘Die Target-Falle‘. Sinn points out that the option of self-rescue for the crisis-affected countries by drawing Target credit forces Germany to approve the formal rescue facilities and eventually to accept Eurobonds as well. He considers the resulting path dependence in policy-making a "trap". Analysis of TARGET2 balances countering the IFO conclusions have been advanced by economist Karl Whelan at University College Dublin. In summer 2012, Thomas A. Lubik, a senior economist and research advisor, and Karl Rhodes, a writer, both at the Federal Reserve Bank of Richmond (Virginia, USA), cited Whelan's work and also drew parallels and distinctions between the US Fed and the ECB in analysing the balances. Lubik and Rhodes argued that "TARGET2 merely reflects persistent imbalances in current accounts and capital accounts. It does not cause them ... [and does not represent] a 'stealth bailout' of the periphery nations". Sinn countered that he was misinterpreted in this point insofar as he was just "saying that the current-account deficits were sustained with the extra refinancing credit behind the TARGET balances" and this would "not equate to claiming that current-account deficits and TARGET deficits were positively correlated".
The TARGET2 system is closed on Saturdays and Sundays and on the following public holidays in all participating countries: New Year (1 January), Good Friday, Easter Monday, Labour Day (1 May), and the first and second days of Christmas (25 and 26 December).
TARGET2 main features
TARGET2 is a single-platform system and therefore provides an enhanced, harmonised service. The system benefits from economies of scale which allows it to charge much lower fees and offer better cost-efficiency than the decentralised first-generation system. All participants – irrespective of where they are located – are offered the same high-quality services, functionalities and interfaces, as well as a single price structure.
A modular approach was adopted for the development of the Single Shared Platform (SSP). Every module in the SSP is closely related to a specific service. The Payments Module, for example, is used for the processing of payments.
Some of those modules (i.e. the Home Accounting Module, the Standing Facilities Module and the Reserve Management Module) can be used by the individual central banks on an optional basis. Central banks which do not use these modules offer the relevant services via applications within their own internal technical environments.
SWIFT standards and services (i.e. FIN, InterAct, FileAct and Browse) are used in the harmonised communication between the system and its participants.
Before the introduction of TARGET2, some central banks held "home accounts" (also called "proprietary home accounting systems") outside their RTGS systems. These were used primarily to manage minimum reserves, standing facilities and cash withdrawals, but also to settle ancillary systems’ transactions.
It was agreed that, in the context of the new system, these types of transaction should ultimately be settled on the RTGS accounts held on the SSP. However, some countries’ domestic arrangements did not allow these operations to be moved rapidly to the SSP. As a result, the Eurosystem agreed on a maximum transition period of four years for moving the settlement of these payments to the SSP.
The Information and Control Module (ICM) allows direct users to access information and manage parameters linked to balances and payments online. Via the ICM, users have access to the Payments Module and the Static Data Management function. Users of the ICM are able to choose what information they receive and when. Urgent messages (e.g. system broadcasts from central banks and warnings concerning payments with a debit time indicator) are automatically displayed on the screen.
TARGET2 provides settlement services for a wide range of ancillary systems. While each of these used to have its own settlement procedure, TARGET2 now offers six generic procedures for the settlement of ancillary systems and allows these systems to access any account on the SSP via a standardised interface.
In 2012, TARGET2:
- had 999 direct participants, 3,386 indirect participants and 13,313 correspondents;
- settled the cash positions of 82 ancillary systems;
- processed a daily average of 354,185 payments, representing a daily average value of €2,477 billion;
- the average value of a TARGET2 transaction was €7,1 million;
- two-thirds of all TARGET2 payments (i.e. 68%) had a value of less than €50,000 each; 11% of all payments had value of over 1 EUR million each;
- the peak in volume turnover was 29 June 2012 with 536,524 transactions and peak value turnover was on 1 March 2012 with €3,718 billion;
- TARGET2’s share in total large-value payment system traffic in euro was 92% in value terms and 58% in volume terms;
- the SSP technical availability was 100%;
- 99.98% of TARGET2 payments were processed in less than five minutes.
Liquidity management in TARGET2
The availability and cost of liquidity are two crucial issues for the smooth processing of payments in RTGS systems. In TARGET2, liquidity can be managed very flexibly and is available at low cost since fully remunerated minimum reserves – which credit institutions are required to hold with their central bank – can be used in full for settlement purposes during the day. The averaging provisions applied to minimum reserves allow banks to be flexible in their end-of-day liquidity management. The overnight lending and deposit facilities also allow for continuous lliquidity management decisions. The Eurosystem provides intraday credit. This credit must be fully collateralised and no interest is charged. However, all Eurosystem credit must be fully collateralised, i.e. secured by other assets. The range of eligible collateral is very wide. Assets eligible for monetary policy purposes are also eligible for intraday credit. Under Eurosystem rules, credit can only be granted by the national central bank of the Member State where the participant is established. Banks’ treasury managers have a keen interest in the use of automated processes for the optimisation of payment and liquidity management. They need tools that will allow them to track activity across accounts and, where possible, make accurate intraday and overnight funding decisions from a single location – e.g. their head office.TARGET2 users have, via the Information and Control Module, access to comprehensive online information and easy-to-use liquidity management features that meet their business needs.
Liquidity management features in TARGET2: TARGET2 has a range of features allowing efficient liquidity management, including payment priorities, timed transactions, liquidity reservation facilities, limits, liquidity pooling and optimisation procedures.
Access criteria in TARGET2
The access criteria for TARGET2 aim to allow broad levels of participation by institutions involved in clearing and settlement activities. Supervision by a competent authority ensures the soundness of such institutions. Supervised credit institutions established within the European Economic Area are the primary participants. Supervised investment firms, clearing and settlement organisations which are subject to oversight and government treasuries can also be admitted as participants. Direct participants hold an RTGS account and have access to real-time information and control tools. Direct participants are responsible for all payments sent from or received on their accounts by themselves or any indirect participants operating through them. Indirect participation means that payment orders are always sent to and received from the system via a direct participant, with only the relevant direct participant having a legal relationship with the Eurosystem. Finally, bank branches and subsidiaries can choose to participate in TARGET2 as multi-addressee access or addressable BICs (Bank Identifier Code).
- TARGET2 Securities
- European Central Bank
- List of acronyms: European sovereign-debt crisis
This article incorporates text from the corresponding German Wikipedia articles on TARGET and TARGET2 as of 4 April 2008. More text also from the website of the European Central Bank which provides and maintains information on TARGET2 both for the general public as for professional users of TARGET2
- John Glover (13 March 2012). "Soaring Target2 Imbalances Stoke German Risk Angst: Euro Credit". Bloomberg. Retrieved 2 April 2012.
- "TARGET2 – Prices", Deutsche Bundesbank webpage.
- Sinn, Hans-Werner, Neue Abgründe, Wirtschaftswoche, No. 8, 21 February 2011, p. 35.
- Sinn, Hans-Werner, Tickende Zeitbombe, "Süddeutsche Zeitung", No. 77, 2 April 2011, p. 24.
- Sinn, Hans-Werner, Die riskante Kreditersatzpolitik der EZB, Frankfurter Allgemeine Zeitung, No. 103, 4 May 2011, p. 10.
- Sinn, Hans-Werner, Target-Salden, Außenhandel und Geldschöpfung, ifo Schnelldienst 64, No. 9, 2011.
- Sinn, H. W.; Wollmershäuser, T. (2012). "Target loans, current account balances and capital flows: The ECB's rescue facility". International Tax and Public Finance 19 (4): 468–508. doi:10.1007/s10797-012-9236-x.
- The authors presented their findings at various conferences, such as H.-W. Sinn’s lectures on May 9th 2011 at the Humboldt University and showed that Target balances are classical balance-of-payment imbalances. Their method was also used later by the ECB itself, in their October 2011 monthly report.
- European Central Bank: TARGET2 balances of national central banks in the Euro area, Monthly Bulletin, October 2011, p. 36, footnote 5.
- Sinn, Hans-Werner, "Fed versus ECB: How TARGET debts can be repaid", Vox, March 2012.
- Sinn, Hans-Werner, Die Target-Kredite der deutschen Bundesbank, ifo Schnelldienst 65, Special issue, 21 March 2012, pp. 3–34.
- Sinn, Hans-Werner, Die Target-Falle: Gefahren für unser Geld und unsere Kinder, Hanser, Munich 2012.
- Sinn, Hans-Werner, Helmut Schlesinger, Wilhelm Kohler, Charles B. Blankart, Manfred J. M. Neumann, Peter Bernholz, Thomas Mayer, Jochen Moebert and Christian Weistroffer, Georg Milbradt, Stefan Homburg, Friedrich L. Sell and Beate Sauer, Ingo Sauer, Jens Ulbrich and Alexander Lipponer, Christian Fahrholz and Andreas Freytag, Ulrich Bindseil, Philippine Cour-Thimann und Philipp Koenig, Franz-Christoph Zeitler, Klaus Reeh, in: Sinn, Hans-Werner (ed.), The European Balance of Payments Crisis, CESifo Forum, Special Issue, January 2012.
- Marsh, David, "10 myths about the European quagmire", MarketWatch, 27 February 2012. Myth No. 9 addresses Target-2. Retrieved 2012-02-27.
- Deutsche Bundesbank, TARGET2-Salden der Bundesbank , Press release, 22 February 2011.
- Deutsche Bundesbank, The dynamics of the Bundesbank’s TARGET2 balance, Monthly Report 63, March 2011, No. 3, pp. 34–37.
- Marsh, David, "Weidmann reawakens debate on Bundesbank’s power", MarketWatch, 5 March 2012. Retrieved 2012-03-07.
- Jens Ulbrich and Alexander Lipponer, Balances in the Target2 Payments System – A Problem?, in: Sinn, Hans-Werner (ed.), The European Balance of Payments Crisis, CESifo Forum, Special Issue, January 2012, pp.73–76.
- ifo Institute: "The Exposure Level"
- Institute of Empirical Economic Research, Osnabrueck University: Target2 data
- De Grauwe, Paul and Yuemei Ji, What Germany should fear most is its own fear, VOX, 18 September 2012.
- Sinn, Hans-Werner, Target losses in case of a euro breakup, Vox, 22 October 2012.
- Sinn, Hans-Werner, Die Target-Falle: Gefahren für unser Geld und unsere Kinder, Hanser, Munich 2012, Chapter 7, Section "Die Umwidmung der Ersparnisse".
- Lubik, Thomas A., and Karl Rhodes, "TARGET2: Symptom, Not Cause, of Eurozone Woes", richmondfed.org, August 2012; via Steve Goldstein, "Fed bank weighs in on hot Europe debate", MarketWatch, 6 August 2012. Retrieved 2012-08-06.