Abstract
Lessons from TARGET2 Imbalances: the Case for the ECB Being a Lender of Last Resort
Highlights
The emergence of the TARGET 2 imbalances was only an accounting phenomenon resulting from the fact that these liquidity loans were technically extended by the debtor countries’ national central banks which are de facto ECB’s regional branches
As soon as the ECB’s quantitative easing (QE) programme ends TARGET2 imbalances will start to recede again, but the process may progress slowly until the European Banking Union is completed. Without such a union Eurozone interbank money markets will continue to be ‘fragmented,’ i.e. the risk premiums are likely still to vary among member countries. If they are higher in debtor countries their commercial banks may continue to borrow liquidity at a lower rate from their national central banks’ (NCBs) instead on the interbank market, which may slow the reduction of TARGET2 imbalances (Cecchetti & Schoenholtz, 2018; De Grauwe et al, 2017; Whelan, 2017; Gros, 2017)
When viewed from this perspective TARGET2 imbalances illustrate the advantages of having an international central bank
Summary
TARGET23 is the ECB’s payments system used for clearing and settling interbank claims and liabilities. The ECB was fulfilling its normal central banking role of lender of last resort The importance of this ECB role in saving the Eurozone was accentuated in 2012, when the Eurozone sovereign debt crisis was stopped not by the official announcements concerning the increased volumes of funds at the disposal of the European Stability Mechanism (ESM) but by the declaration that the ECB may (if necessary) launch a massive intervention on the Eurozone sovereign debt market under the Outright Monetary Transactions (OMT) programme. The last section concludes that the experiences with TARGET2 imbalances make a strong case for international central banks as institutions that safeguard international financial stability
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