TARGET2 : The ECB's Overlooked Legacy

TARGET 2 is the large-value payments system run at the ECB that (inter alia) facilitates transactions between banks across intra-Euro area national borders. TARGET 2 thus ensures that arbitrage is possible across the constituent national money markets within the Euro area. TARGET 2 balances are thus the consequence of the institutional structure of the Euro area, where NCBs were retained to conduct monetary policy operations at the national level. During the first phases of the financial crisis in the Euro area (and prior to the quantitative easing, QE), rising TARGET 2 imbalances reflect ed essentially a “flight to quality”, whereby deposits flee the banks of weaker countries for the relative safety of banks in stronger countries . From March 2015, rising imbalances was a mechanical implication of QE whereby central bank asset purchases from banks that hold their liquid balances in other Euro area countries (for example, a non-Euro area bank with its continental European subsidiary in Germany or the Netherlands) . Since the quantitative tightening (QT) operat ing since 2023, a rebalancing of both TARGET 2 claims and liabilities was expected. This materialises for most countries except for France. Since June 2024 (date of the dissolution of the National Assembly), France’s liabilities in TARGET 2 system have increase d , whereas they averaged zero by then. After checking various indicators , we think that th e increase in French imbalances may reflect arbitrage among foreign investors located outside France (mostly in Germany, The Netherlands and Luxembourg) rather than a market sentiment of systemic risk for French banks .