TARGET2

TARGET2
Name	TARGET2
Country	Eurozone
Members	European Central Bank, Eurosystem
Established	2007
Currency	Euro
Type	Real-time gross settlement

TARGET2. It is the second-generation Trans-European Automated Real-time Gross settlement Express Transfer system, the real-time gross settlement (RTGS) system for the Eurozone and broader European Union. Owned and operated by the Eurosystem, which comprises the European Central Bank and the national central banks of Euro area countries, it is one of the world's largest payment systems. TARGET2 processes critical large-value Euro payments, ensuring the safe and efficient functioning of the European monetary union and supporting the implementation of the ECB's monetary policy.

Overview

TARGET2 is the core RTGS infrastructure for settling central bank money across Europe, handling payments related to monetary policy operations, interbank transfers, and other large-value Euro transactions. The system is legally underpinned by the TARGET2 Guideline established by the European Central Bank. It provides settlement services for other major market infrastructures, including the Eurosystem’s TARGET2-Securities platform and the pan-European clearing house Euroclear. Participation is mandatory for all Euro area central banks and is open to credit institutions in the European Economic Area and beyond, connecting entities from Austria to Cyprus.

History and development

The original TARGET system was launched in 1999 alongside the introduction of the Euro to facilitate cross-border payments within the new monetary union. To address inefficiencies and technological fragmentation, the Eurosystem decided to consolidate the platform into a single shared technical infrastructure. Developed by a consortium of three central banks—the Bundesbank, the Banque de France, and the Banca d'Italia—TARGET2 went live in November 2007. Its creation was a key milestone in the integration of the European financial market, succeeding the earlier TARGET and various national RTGS systems like Germany’s ELS.

Technical operation

Operating on a single shared platform, TARGET2 processes payments with immediate finality in central bank money, eliminating settlement risk. The system is based on a centralized IT architecture managed by the Eurosystem, with backup sites ensuring high availability. It interfaces with other critical financial infrastructures, such as the Continuous Linked Settlement bank for foreign exchange trades and various securities settlement systems. Technical oversight and evolution fall under the purview of the Market Infrastructure Board of the European Central Bank.

Role in the European financial system

TARGET2 is fundamental to the smooth execution of the ECB's monetary policy, as it settles operations like main refinancing operations and marginal lending facility transactions. It provides the essential liquidity circulation mechanism for the Eurozone banking system, directly impacting the euro overnight index average. The system also plays a crucial role in ensuring financial stability, particularly during periods of stress, by providing an unquestionably secure settlement asset. Its reliability supports the integration of European payment systems and the broader objectives of the Single Euro Payments Area.

Imbalances and controversies

A significant phenomenon associated with TARGET2 is the accumulation of large persistent balances, known as TARGET2 balances, which reflect cross-border capital flows and payment imbalances within the Eurosystem. These imbalances surged during the European debt crisis, as capital fled the periphery to core nations like Germany and the Netherlands, and again during the COVID-19 pandemic due to the ECB's pandemic emergency purchase programme. Economists like Hans-Werner Sinn have highlighted these balances as a form of implicit credit, sparking debate about their implications for European Central Bank risk and the stability of the monetary union.

Future developments

TARGET2 is set to be replaced by a new unified platform, the Eurosystem Single Market Infrastructure Gateway, as part of the broader TARGET Services strategy. This evolution aims to further harmonize and modernize the Eurosystem’s market infrastructure, offering enhanced services for instant payments and greater interoperability with other systems. The development aligns with the ECB's exploration of a digital euro, for which TARGET2 or its successor would likely provide the critical settlement backbone, ensuring the Eurosystem’s continued pivotal role in the European financial landscape.

Category:Payment systems Category:European Central Bank Category:Euro