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TARGET2 and Central Bank Balance Sheets

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  • Karl Whelan

    (University College Dublin)

Abstract

The Eurosystem’s TARGET2 payments system has featured heavily in academic and popular discussions in recent years. Much of this commentary had described the system as being responsible for a “secret bailout” of Europe’s periphery which has led to huge credit risks for the Bundesbank should the euro break up. This paper discusses the TARGET2 system, focusing in particular on how it impacts the balance sheets of the central banks that participate in the system. It concludes that the TARGET2 is largely innocent of the charges that have been levelled against it. Arguments that TARGET2 facilitated a bailout of the periphery or that the system is playing a key role in facilitating peripheral current account deficits turn out to be wide of the mark. Risks to Germany due to the loss of TARGET2-related revenues for the Bundesbank after a euro break-up turn out to relatively small because these revenues are limited and because there are potentially large gains from new seigniorage revenues in this scenario. Many criticisms involving TARGET2 turn out, on closer examination, to be criticisms of the ECB’s core principle of treating credit institutions across the euro area in an equal manner. Proposals that the ECB adopt procedures that discriminate between banks in different countries (or that restrict the operation of payments systems in certain countries) are likely to be incompatible with the continuation of the euro as a common currency.

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File URL: http://www.ucd.ie/t4cms/WP12_29.pdf
File Function: First version, 2012
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Bibliographic Info

Paper provided by School Of Economics, University College Dublin in its series Working Papers with number 201229.

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Length: 47 pages
Date of creation: 21 Nov 2012
Date of revision:
Handle: RePEc:ucn:wpaper:201229

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Keywords: TARGET2; ECB; Euro Crisis;

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  1. Whittaker, John, 2011. "Eurosystem debts, Greece, and the role of banknotes," MPRA Paper 38406, University Library of Munich, Germany.
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Cited by:
  1. Philippine Cour-Thimann, 2013. "CESifo Forum Special Issue April 2013: Target Balances and the Crisis in the Euro Area," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, vol. 0, pages 05-50, 05.

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