Interpreting TARGET2 balances

Stephen Cecchetti, Robert McCauley and Patrick McGuire

No 393, BIS Working Papers from Bank for International Settlements

Abstract: The increase in the TARGET2 balance for the Bundesbank has led to a debate in Germany about the appropriate interpretation and policy response, if any. In this paper we review the evidence for the current account financing interpretation, and find it wanting in explaining the data in 2012. BIS international banking data, by contrast, point to the importance of TARGET2 balances as a symptom of a reduction by core European banks of credit previously extended to borrowers in peripheral Europe. These same data suggest that banks headquartered outside the euro area, particularly UK banks, boosted TARGET2 balances by hedging redenomination risk. As such, TARGET2 balances reflect not only concern regarding actual credit exposures but also potential currency exposures.

Keywords: payment system; financial crisis; monetary policy; international lending (search for similar items in EconPapers)
Pages: 22 pages
Date: 2012-12
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Citations: View citations in EconPapers (51)

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Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:393

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