Is this bank ill? The diagnosis of doctor TARGET2

Abstract

We develop indicators for signs of liquidity shortages and potential financial problems of banks by studying transaction data of the Dutch part of the European real time gross settlement system and collateral management data. The indicators give information on 1) overall liquidity position, 2) the interbank money market, 3) the timing of payment flows, 4) the collateral's amount and use and 5) bank run signs. This information can be used both for monitoring the TARGET2 payment system and for individual banks' supervision. By studying these data before, during and after stressful events in the crisis, banks' reaction patterns are identified. These patterns are translated into a set of behavioural rules, which can be used in payment systems' stress scenario analyses, such as e.g. simulations and network topology. In the literature behaviour and reaction patterns in simulations are either ignored or very static. To perform realistic payment system simulations it is crucial to understand how banks react to shocks.