The European Central Bank said a Target2 claim of a national central bank in the euro area doesn’t accurately reflect its risk exposure.
“In the context of the monetary union, a Target2 claim is not necessarily a measure of the financial risk exposure of the NCB in question,” the ECB said in its annual Target report published today. “The risk associated with the provision of central bank liquidity to banks as part of monetary policy implementation is mitigated by a risk management framework, which includes the requirement of adequate collateral valued at market prices and subject to haircuts.”
Target2 is the euro’s cross-border payments system, and as such reflects the stresses that the financial and sovereign-debt crises have wreaked on the single currency area. As capital from crisis-stricken countries like Greece and Italy has sought safety in northern havens such as Germany and the Netherlands, and banks from southern states have borrowed cash from the ECB, imbalances have built up.
While Germany, the Netherlands, Luxembourg and Finland have a net claim on the system’s hub, the ECB, countries including Greece, Italy, Spain have net liabilities. Those imbalances have caused controversy in Germany, where academics including the Ifo Institute’s Hans-Werner Sinn have charged that the Target2 system allows the financing of southern states’ balance-of-payments deficits by the north.
“Besides the pledge of collateral, the banks remain fully responsible for their borrowings obtained from the Eurosystem,” the ECB said. “The residual risk that may emerge despite risk management features is, as a rule, shared among the euro area NCBs according to their share in the ECB’s capital.”
The ECB said the Target2 system functioned “smoothly” in 2011 and had a market share of 91 percent of the total value of payments in large-value euro payment systems. The volume of payments processed in Target2 rose 1.1 percent from 2010 to 89.6 million transactions, while the total value of payments increased 3.3 percent to almost 613 trillion euros ($760 trillion), the ECB said.