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Liquidity usage in TARGET2

Author

Listed:
  • Duca-Radu, Ioana
  • Testi, Sara

Abstract

This article examines liquidity usage in TARGET2 – the real-time gross-settlement (RTGS) system owned and operated by the Eurosystem – and related developments over time. More specifically, it analyses the velocity at which liquidity circulates in the system and the interplay between the liquidity sources that participants use to fund their payment obligations. Growth in levels of central bank reserves has affected TARGET2 participants’ behaviour, giving lower incentives to recycle incoming liquidity, which is reflected in decreased liquidity velocity and an increased use of the central bank reserves on the account balance to fund outgoing payments. Interest rates are also found to affect the behaviour of TARGET2 participants. Moreover, it is shown that liquidity usage varies significantly across participants and countries. A bank-level panel analysis quantifies the impact of specific TARGET2 participant features and monetary policy decisions on liquidity usage in TARGET2. JEL Classification: G10, G20, G21

Suggested Citation

  • Duca-Radu, Ioana & Testi, Sara, 2021. "Liquidity usage in TARGET2," Economic Bulletin Articles, European Central Bank, vol. 3.
    • Handle: RePEc:ecb:ecbart:2021:0003:3
    Note: 2655259
    as

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    File URL: https://www.ecb.europa.eu//pub/economic-bulletin/articles/2021/html/ecb.ebart202103_03~2e159cbd38.en.html
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    Citations

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    Cited by:

    1. Gara Afonso & Darrell Duffie & Lorenzo Rigon & Hyun Song Shin, 2022. "How Abundant Are Reserves? Evidence from the Wholesale Payment System," Staff Reports 1040, Federal Reserve Bank of New York.

    More about this item

    Keywords

    Intraday liquidity; Liquidity efficiency; Payment funding sources; Payment systems; TARGET2;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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