TARGET2 and central bank balance sheets

• Published in: Economic policy Vol. 29; no. 77; pp. 79 - 137
• Main Authors: Whelan, Karl, Westermann, Frank, Ilzetzki, Ethan
• Format: Journal Article
• Language: English
• Published: Oxford John Wiley & Sons Ltd 01-01-2014; Oxford University Press
• Subjects: Bailouts; Balance of payments; Balance sheets; Bank assets; Bank liabilities; Central bank balance sheets; Central banks; Credit; Credit risk; Discussion groups; Economic crisis; Economic policy; Economic theory; Euro; Euro Zone; Eurocurrency market; Europe; European Central Bank; European Union; Eurosystem; Eurozone; Financial liabilities; Germany; Monetary policy; National central banks; Payment; Studies; Europe; Germany
• ISSN: 0266-4658; 1468-0327
• DOI: 10.1111/1468-0327.12025

The eurozone's TARGET2 payments system has featured heavily in academic and popular discussions of the euro crisis. Some of this commentary has described the system as being responsible for a 'secret bailout' of Europe's periphery. Another common theme has been that the system has built up large credit risks for Germany 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 discusses the factors driving TARGET2 balances, considers some counterfactual cases in which eurozone monetary policy might have operated differently, examines the risks to Germany and considers proposals for settlement of these balances.