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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.

Suggested Citation

  • Stephen Cecchetti & Robert McCauley & Patrick McGuire, 2012. "Interpreting TARGET2 balances," BIS Working Papers 393, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:393

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    References listed on IDEAS

    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;International Institute of Public Finance, vol. 19(4), pages 468-508, August.
    2. William A. Allen & Richhild Moessner, 2013. "The Liquidity Consequences of the Euro Area Sovereign Debt Crisis," World Economics, World Economics, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 14(1), pages 103-126, January.
    3. 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.
    4. Raphael A. Auer, 2014. "What drives TARGET2 balances? Evidence from a panel analysis," Economic Policy, CEPR;CES;MSH, vol. 29(77), pages 139-197, January.
    5. Hans-Werner Sinn, 2012. "Target Losses in Case of a Euro Breakup," CESifo Forum, Ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 13(4), pages 51-58, December.
    6. 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.
    7. 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.
    8. Bindseil, Ulrich & Winkler, Adalbert, 2012. "Dual liquidity crises under alternative monetary frameworks: a financial accounts perspective," Working Paper Series 1478, European Central Bank.
    9. 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.
    10. 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.
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    Blog mentions

    As found by, the blog aggregator for Economics research:
    1. ECB AQR: Nervous Banks Make Banking Safer
      by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2014-05-16 00:07:35
    2. Update on Target2 Balances: Limited progress
      by Kim Schoenholtz in Money, Banking and Financial Markets on 2014-06-12 17:31:17
    3. After Greece: Saving EMU
      by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2015-07-13 17:37:21
    4. After Greece: Saving EMU
      by Stephen G. Cecchetti in Huffington Post Business on 2015-08-07 03:51:29
    5. The Future of the Euro
      by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2017-02-13 19:27:17


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Tomáš Klinger & Petr Teply, 2014. "Modelling Interconnections in the Global Financial System in the Light of Systemic Risk," ACTA VSFS, University of Finance and Administration, vol. 8(1), pages 64-88.
    2. Tomas Pavlicek, 2014. "The Developmnet of the Self-employed Sector in the Czech Republic in the Years 2006 - 2010," ACTA VSFS, University of Finance and Administration, vol. 8(1), pages 28-46.
    3. Cedric Durand & Sébastien Villemot, 2016. "Balance sheets after the EMU : an assessment of the redenomination risk," Documents de Travail de l'OFCE 2016-31, Observatoire Francais des Conjonctures Economiques (OFCE).
    4. repec:pra:mprapa:67187 is not listed on IDEAS
    5. Eichengreen, Barry & Mehl, Arnaud & Chitu, Livia & Richardson, Gary, 2015. "Mutual Assistance between Federal Reserve Banks: 1913–1960 as Prolegomena to the TARGET2 Debate," The Journal of Economic History, Cambridge University Press, vol. 75(03), pages 621-659, September.
    6. Christiaan Pattipeilohy, 2016. "A comparative analysis of developments in central bank balance sheet composition," DNB Working Papers 510, Netherlands Central Bank, Research Department.
    7. Jaroslav Vostatek, 2014. "Tax Treatment of Public and Private Pensions," ACTA VSFS, University of Finance and Administration, vol. 8(1), pages 7-27.
    8. Christiaan Pattipeilohy, 2013. "A descriptive analysis of the balance sheet and monetary policy of De Nederlandsche Bank: 1900-1998 and beyond," DNB Occasional Studies 1103, Netherlands Central Bank, Research Department.
    9. David Tison, 2014. "Impact of Non-cooperative Oligopoly of the Banking System on Its Pro-cyclicality in the Czech Republic," ACTA VSFS, University of Finance and Administration, vol. 8(1), pages 47-63.
    10. Carlo Panico, Francesco Purificato, Elvira Sapienza, 2015. "Benefici, problemi e prospettive dell’integrazione monetaria in Europa (Benefits, issues and future of monetary integration in Europe)," Moneta e Credito, Economia civile, vol. 68(271), pages 305-339.
    11. Anton, Roman, 2015. "Monetary Development and Transmission in the Eurosystem," MPRA Paper 67323, University Library of Munich, Germany, revised 08 Oct 2015.
    12. Aitor Erce, 2014. "Cross‐Border Banking, Externalities And Sovereign Distress: Does The Euro Need A Common Banking Authority?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 19(3), pages 188-203, July.


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