TARGET2 imblances are double what the ECB reports

Published on 12th May 2023

There has been long and ongoing debate about the nature of the sizeable loans and deposits that the Eurozone national central banks (NCBs) run with one another within the TARGET2 payment system. The debate has overlooked that the balances are nearly double what the European Central Bank (ECB) reports, and that the report only shows the amounts at the end-of-day on one day per month, and after netting.

This problem is discussed in the newly-released book ‘The shadow liabilities of EU Member States, and the threat they pose to global financial stability’, written by Bob Lyddon and published by The Bruges Group.[1]

The ECB’s final month-end report for 2021 on the TARGET2 balances showed NCBs with deposits of €1.8 trillion and loans of €1.5 trillion, the difference of €0.3 trillion being a loan to the ECB itself.

The Eurosystem aggregate balance sheet on the same day showed loans to Euro-area ‘Monetary Financial Institutions’ of €5.5 trillion, whilst the consolidated balance sheet showed loans by Eurosystem members (under Targeted Longer-Term Refinancing Operations) to Euro-area ‘Credit Institutions’ of €2.2 trillion.[2] €3.3 trillion of loans were reversed out of the ‘consolidated’ balance sheet compared to the ‘aggregate’ one because they were between ‘Monetary Financial Institutions’ that were not ‘Credit Institutions’ i.e. they were loans between Eurosystem members, and TARGET2 is the mechanism for doing that.

With €1.8 trillion of this €3.3 trillion being the TARGET2 balances after netting (as per the ECB’s report), it follows that there were an additional €1.5 trillion of TARGET2 loans and deposits amongst the NCBs that were eliminated by the netting.

The gross TARGET2 debts of Eurozone member states (through their NCBs) at the end of 2021 were thus the netted loans of €1.5 trillion plus another €1.5 trillion eliminated by the netting, or €3 trillion in all.[3]

The netting is questionable in its efficacy, and may be a legal construction with no effect on account balances: there is no mention of the netting in the sections of the TARGET2 operational manual that deal with what operations are carried out during the TARGET2 end-of-day process and subsequent start-of-day process. These processes only last for about an hour so whatever result is crystallized by the netting is only valid for that short period at most: the netting agreement specifically states that it only applies to the balances at end-of-day.

This leads on to the possibility that the balances during the business day could be meaningfully different, and also that the end-of-day picture could be different on the other 19 or so business days in the month upon which the ECB produces no report.

Transparency could only be obtained if full-day statements were put into the public domain for the 600 current accounts that NCBs run with one another and with the ECB for the purposes of TARGET2: the 24 TARGET2-participating NCBs have 552 accounts with one another and each one holds an account for and an account with the ECB, which adds the other 48 accounts.

Failing that, the market has to rely on a snapshot figure, at end-of-day, valid for an hour, once a month. Even the figure of €3 trillion may be exceeded at the end of other business days or during the 23 hours when TARGET2 is open on any business day – including during the ones at the end of which the ECB issues its reports.

[1] ISBN 978-1-8380658-9-8

[2] The ‘Eurosystem’ is a term for the collective of the ECB and the NCBs. The Eurosystem aggregate balance sheet is all their individual balance sheets combined, without making any offset for their business with one another. The Eurosystem consolidated balance sheet reverses out the offsets.

[3] The €0.3 trillion owed by the ECB has been reversed out: it is a contingent liability of member states whereas the debts of the NCBs are member state debts