TARGET2 is the Real-Time Gross Settlement (RTGS) payment system owned and operated by the Eurosystem, where payments in euro are settled in central bank money.
TARGET2 participants are the national central banks (NCBs) of the Member States of the euro area, the European Central Bank (ECB) and the national central banks of Bulgaria, Denmark, Poland, Romania and Croatia. According to a decentralised design, each NCB operates the respective national component of TARGET2. TARGET2-GR is the Greek component of TARGET2 and is operated by the Bank of Greece.
TARGET2-GR participants are credit institutions (CIs) operating in Greece, DIAS Interbanking Systems S.A. (DIAS), the Athens Clearing Office (ACO), the Hellenic Central Securities Depository (ATHEXCSD), the Athens Exchange Clearing House (ATHEXClear) and the Bank of Greece.
TARGET2 processes payments across the entire range of transactions in euro within the Eurosystem. In particular,
- payments related to the monetary policy operations of the Eurosystem;
- the euro-denominated cash leg of transactions in securities and foreign exchange operations;
- payments relating to the operations of other large-value net settlement payment systems and retail payment systems;
- payments between ΝCBs and/or CIs participating in TARGET2.
TARGET2 settles the following payment orders:
- credit transfers between participants for their own account (e.g. interbank payments) or on behalf of their customers (customer payments). In particular, customer payments settled in the system are retail payments relating to purchases of goods, services or assets; debt repayment; extension of credit; fund transfers, etc.;
- net settlement orders from Ancillary Systems;
- direct debits, typically in the context of specific Eurosystem operations (standing facilities, refinancing operations, etc.), but also between participants following authorisation.
Each TARGET2 participant holds with an NCB at least one current account, through which it sends or receives payments in central bank money. Payments through TARGET2 are classified as “domestic” when carried out between two participants that hold their respective current accounts within the same NCB, or as “cross-border” when carried out between two participants that hold their respective current accounts with different NCBs, i.e. that participate in different TARGET2 components.
When a participant makes a cross-border payment through TARGET2, the current account held by that participant with an NCB is debited, and the counterparty’s current account with another NCB is credited. This payment gives rise to an equivalent liability of the former NCB (the payer’s NCB) vis-à-vis the latter NCB (the payee’s NCB). Therefore, cross-border payments through TARGET2 create, for the NCBs involved, bilateral balances (claims and corresponding liabilities) within the European System of Central Banks (ESCB).
TARGET bilateral balances between NCBs are aggregated and netted at the end of each TARGET2 business day by novation, meaning that the constellation of bilateral flows between all NCBs is replaced with single net positions vis-à-vis the ECB only.
Special dedicated accounts–TARGET2 accounts – have been created for all central banks (including the ECB), which reflect their cumulative claims and liabilities vis a vis the ECB. Thus, on a daily basis, all NCBs show a net position (claim or liability) vis-à-vis the ECB, which is accounted for in their balance sheets under “Net claims/liabilities arising from balances of TARGET2 accounts”.
It should be noted that, at the ESCB level, the sum of the balances of the NCBs’ TARGET2 accounts is by definition zero.
Example of cross-border payments and changes in the TARGET2 balance
Let us take an example in which the following payments are made between CIΑ of Country1, and CIΒ and CIC of Country2:
- CIΑ makes a payment of €100 to CIΒ. The current account of CIΑ with NCB1 is debited, and the current account of CIΒ with NCB2 is credited.
- CIΒ makes a payment of €70 to CIΑ. The current account of CIB with NCB2 is debited, and the current account of CIA with NCB1 is credited.
- CIC makes a payment of €50 to CIΑ. The current account of CIC with NCB2 is debited, and the current account of CIA with NCB1 is credited
At end-of-day, all payments are aggregated and netted out at the ESCB level:
- NCB1 has a TARGET claim of €20 vis-à-vis the ECB, as a result of the final net inflow of funds into the current account of CIΑ.
- NCB2 has a TARGET liability of €20 vis-à-vis the ECB, as a result of the final net outflow of funds from the current accounts of CIΒ and CIC.
The charts below show the evolution of the balance (in € billions) of the Bank of Greece TARGET2-GR account, its maximum annual figures, as well as its recent changes both on an annual and a monthly basis.
The positive axis shows the balance of the TARGET2-GR account in absolute figures, representing liabilities towards the ESCB.
For the Bank of Greece, the liability item “Net liabilities arising from balances of TARGET2 accounts” reflects its position vis-à-vis the ECB. As shown in the chart, this liability increased until the end of 2012, as domestic credit institutions faced net fund outflows coupled with impaired access to short-term funding markets. Improved funding conditions in the period 2012-2014 and 2015-2019 are partly reflected in a reduced TARGET2-GR balance, which, however, has started increasing since late 2019.
Any economic interpretation of TARGET2 balance developments warrants particular caution, given that TARGET2 allows for a number of options for large multi-country banking groups, in terms of connection mode and/or centralised liquidity management through a single current account. Moreover, the access of non-EEA credit institutions to the Eurosystem monetary policy instruments via subsidiaries in countries with TARGET2-participating NCBs significantly blurs the notion of cross-border flows of “national” funds.
Consequently, the periodical changes in TARGET2 balances can only provide indicative information, and certainly not a full picture of net cross-border financial flows between participating countries.