4 TARGET2 FAQs answered

TARGET2 payment systems have been heavily featured in recent years. Some experts are of the opinion that it is the secret bailout of Europe’s periphery which has led to huge credit risks, if the Euro breaks up. We will discuss here some TARGET2 related questions which would be growing in the minds of most people.

TARGET2 is largely innocent of the charges that have been levelled against it. Arguments that TARGET2 facilitated a bailout of periphery or that the system is playing a key role in facilitating peripheral current accounts deficits are utterly baseless.1.  What is TARGET2?

TARGET2 is the real-time gross settlement (RTGS) system owned and operated by the EuroSystem. TARGET stands for Trans-European Automated Real-time Gross settlement Express Transfer system. TARGET2 is the second generation of TARGET.2.  How are payment transactions settled in TARGET2?

Payment transactions in TARGET2 are settled one by one on a continuous basis, in central bank money with immediate finality. There is no upper or lower limit on the value of payments. TARGET2 settles payments related to monetary policy operations, interbank and customer payments, and payments relating to the operations of all large-value net settlement systems and other financial market infrastructures handling the Euro (such as securities settlement systems or central counterparties).3.  How is it operated?

TARGET2 is operated on a single technical platform. Business relationships are established between the TARGET2 users and the respective central bank. In terms of the value processed, TARGET2 is one of the largest payment systems in the world.4.  What are the main features of TARGET2?

TARGET2 is a single-platform system and therefore provides an enhanced, harmonised service. The system benefits from economies of scale, which allows it to charge a lower fee and offer better cost-efficiency than the decentralised first-generation system. All participants are offered the same high-quality services, functionalities and interfaces, as well as a single price structure, irrespective of their location.

TARGET2 liquidity saving features

A modular approach was adopted for the development of the Single Shared Platform (SSP). Every module in the SSP is closely related to a specific service. The Payments Module, for example, is used for the processing of payments. Some of those modules, such as the Home Accounting Module, the Standing Facilities Module and the Reserve Management Module, can be employed by the individual central banks, on an optional status. Central banks which do not use these modules also offer the relevant services via applications within their own internal technical environments. Before the introduction of TARGET2, some central banks held "home accounts" (also called "proprietary home accounting systems") outside their RTGS systems. These were used primarily to manage minimum reserves, standing facilities and cash withdrawals, but also to settle ancillary systems’ transactions. Although many allegations have been levelled against TARGET2 and its implications, there can be no doubt that these allegations are a result of either misinformation or some misunderstanding. It is best for an organization to study TARGET2 extensively to know for themselves about its implications and functions.