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Interpreting TARGET2 balances

  • Stephen Cecchetti
  • Robert McCauley
  • Patrick McGuire

The increase in the TARGET2 balance for the Bundesbank has led to a debate in Germany about the appropriate interpretation and policy response, if any. In this paper we review the evidence for the current account financing interpretation, and find it wanting in explaining the data in 2012. BIS international banking data, by contrast, point to the importance of TARGET2 balances as a symptom of a reduction by core European banks of credit previously extended to borrowers in peripheral Europe. These same data suggest that banks headquartered outside the euro area, particularly UK banks, boosted TARGET2 balances by hedging redenomination risk. As such, TARGET2 balances reflect not only concern regarding actual credit exposures but also potential currency exposures.

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Paper provided by Bank for International Settlements in its series BIS Working Papers with number 393.

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Length: 22 pages
Date of creation: Dec 2012
Date of revision:
Handle: RePEc:bis:biswps:393
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  1. Hans-Werner Sinn & Timo Wollmershäuser, 2012. "Target loans, current account balances and capital flows: the ECB’s rescue facility," International Tax and Public Finance, Springer, vol. 19(4), pages 468-508, August.
  2. Martina Cecioni & Giuseppe Ferrero, 2012. "Determinants of TARGET2 imbalances," Questioni di Economia e Finanza (Occasional Papers) 136, Bank of Italy, Economic Research and International Relations Area.
  3. Hans-Werner Sinn, 2012. "Target Losses in Case of a Euro Break-up," CESifo Working Paper Series 3968, CESifo Group Munich.
  4. Raphael A. Auer, 2013. "What Drives Target2 Balances? Evidence From a Panel Analysis," Working Papers 13.03, Swiss National Bank, Study Center Gerzensee.
  5. Christian Fahrholz & Andreas Freytag, 2012. "Will TARGET2-Balances be Reduced again after an End of the Crisis?," Global Financial Markets Working Paper Series 30-2012, Friedrich-Schiller-University Jena.
  6. Bindseil, Ulrich & Winkler, Adalbert, 2012. "Dual liquidity crises under alternative monetary frameworks: a financial accounts perspective," Working Paper Series 1478, European Central Bank.
  7. Buiter, Willem H. & Rahbari, Ebrahim, 2012. "Target2 Redux: The simple accountancy and slightly more complex economics of Bundesbank loss exposure through the Eurosystem," CEPR Discussion Papers 9211, C.E.P.R. Discussion Papers.
  8. Gros, Daniel & Mayer, Thomas, 2012. "A Sovereign Wealth Fund to Lift Germany’s Curse of Excess Savings," CEPS Papers 7229, Centre for European Policy Studies.
  9. Martin Handig & Robert Holzfeind & Clemens Jobst, 2012. "Understanding TARGET 2: The Eurosystem’s Euro Payment System from an Economic and Balance Sheet Perspective," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 81–91.
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