TARGET2 was the real-time gross settlement (RTGS) system for the Eurozone from its phased introduction in 2007-2008 until its replacement with T2 in March 2023. As such, it was one of the Eurosystem's TARGET Services, replacing the original TARGET (Trans-European Automated Real-time Gross Settlement Express Transfer System) RTGS introduced in 1999. Like the other TARGET Services, it was developed and owned by the Eurosystem.
Overview
TARGET2 was based on an integrated central technical infrastructure, known as the Single Shared Platform (SSP)."Single Shared Platform: General Functional Specifications: Version 2.1", Europa (web portal). SSP was operated by three providing central banks: France (Banque de France), Germany (Deutsche Bundesbank) and Italy (Banca d'Italia). It started to replace the predecessor system TARGET in November 2007.
TARGET2 was also an interbank RTGS payment system for the clearing of cross-border transfers in the eurozone. Participants in the system were either direct or indirect. Direct participants held an RTGS account and had access to real-time information and control tools. They were responsible for all payments sent from or received on their accounts by themselves or any indirect participants operating through them. Indirect participation meant that payment orders were always sent to and received from the system via a direct participant, with only the relevant direct participant having a legal relationship with the Eurosystem. Finally, bank branches and subsidiaries could choose to participate in TARGET2 as multi-addressee access or addressable BICs.
The Eurosystem in March 2023 switched its real-time gross settlement from TARGET2 to T2, which follows ISO 20022. The switch involved transactions for settling payments related to the Eurosystem's monetary policy operations, as well as bank‑to‑bank and commercial transactions. TARGET2 previously handled transactions for over €2.2 trillion per day.
History
Since the establishment of the European Economic Community in 1958, there has been movement towards an integrated European financial market. This movement has been marked by several events: In the field of payments, the most visible were the launch of the euro in 1999 and the cash changeover in the euro area countries in 2002. The establishment of the large-value central bank payment system TARGET was less visible, but also of great importance. It formed an integral part of the introduction of the euro and facilitated the rapid integration of the euro area money market.
The implementation of TARGET2 was based on a decision of the ECB Council of autumn 2002. TARGET2 started operations on 19 November 2007, when the first group of countries (Austria, Cyprus, Germany, Latvia, Lithuania, Luxembourg, Malta and Slovenia) migrated to the SSP. This first migration was successful and confirmed the reliability of SSP. After this initial migration, TARGET2 already settled around 50% of overall traffic in terms of volume and 30% in terms of value.
On 18 February 2008, the second migration successfully migrated to TARGET2, comprising Belgium, Finland, France, Ireland, the Netherlands, Portugal and Spain.
On 19 May 2008, the final group migrated to TARGET2, comprising Denmark, Estonia, Greece, Italy, Poland and the ECB. The six-month migration process went smoothly and did not cause any operational disruptions.
Slovakia joined TARGET2 on 1 January 2009, Bulgaria joined in February 2010, Romania on 4 July 2011, and Croatia in February 2016.
Participation The use of TARGET2 was mandatory for the settlement of any euro operations involving the Eurosystem, consisting of the European Central Bank (ECB) and the national central banks of the 20 European Union member states that were part of the Eurozone by the end of the TARGET2 period. Participation in TARGET2 was mandatory for new member states joining the Eurozone.
TARGET2 services in euro were available to non-Eurozone states. National central banks of states which have not yet adopted the euro could also participate in TARGET2 to facilitate the settlement of transactions in euro. Central banks from four non-Eurozone states Bulgaria, Denmark, Poland and Romania also participated in TARGET2.
In 2012, TARGET2 had 999 direct participants, 3,386 indirect participants and 13,313 correspondents.
Activity
There was no upper or lower limit on the value of payments. TARGET2 had to be used for all payments involving the Eurosystem, as well as for the settlement of operations of all large-value net settlement systems and securities settlement systems handling the euro. TARGET2 was operated on a single technical platform. The business relationships were established between the TARGET2 users and their national central bank. In terms of the value processed, TARGET2 was one of the largest payment systems in the world.
Statistics In 2012, TARGET2: settled the cash positions of 82 ancillary systems, processed a daily average of 354,185 payments, representing a daily average value of €2,477 billion, the average value of a TARGET2 transaction was €7.1 million, two-thirds of all TARGET2 payments (i.e., 68%) had a value of less than €50,000 each; 11% of all payments had value of over €1 million each, the peak in volume turnover was 29 June 2012 with 536,524 transactions and peak value turnover was on 1 March 2012 with €3,718 billion, TARGET2's share in total large-value payment system traffic in euro was 92% in value terms and 58% in volume terms, the SSP technical availability was 100%, and 99.85% of TARGET2 payments were processed in less than two minutes."Target 2" Europa (web portal), 11 April 2023.
Pricing There were two pricing schemes:
Recurring fixed charges and a fixed transaction fee: Monthly fixed charge: €100.00 Single transaction price: €0.80 Recurring fixed charge and a variable transaction fee based on number of transactions: Monthly fixed charge: €1,250.00 Variable transaction price: volume-based between €0.125 and €0.60
Holidays The TARGET2 system was closed on Saturdays and Sundays and on the following public holidays in all participating countries: 1 January, Good Friday and Easter Monday (according to the calendar used by Western Christianity), 1 May, 25 December and 26 December.
Operations Outages In October 2020, the system and TARGET2 Securities experienced an almost-11-hour outage, attributed to a "software glitch in a third-party network device" by the ECB, per a report. Much shorter service interruptions of different sorts have hit Target2 in July 2019, November 2018 and December 2017, and in October 2020 Euronext NV, a stock market on the continent, also experienced some outages, per the report.Fairless, Tom, "Europe’s Core Payments Network Disrupted by Technical Malfunction" , The Wall Street Journal, 28 October 2020. re: Euronext's 2020 event in WSJ . Retrieved 2020-10-28.
Intra-system balances
Starting during the 2008 financial crisis and the euro area crisis, the main subjects of criticism were the unlimited financial balances made available since the establishment of the TARGET system by the national central banks of the Eurosystem on the one hand and by the ECB on the other.
The issue of the increasing TARGET balances was brought to public attention for the first time in early 2011 by Hans-Werner Sinn, president of the Munich-based Ifo Institute for Economic Research. In an article in Wirtschaftswoche, he drew attention to the enormous increase in TARGET claims held by Germany's Bundesbank, from €5 billion at the end of 2006 to €326 billion at the end of 2010, and to the attendant liability risk.Sinn, Hans-Werner, Neue Abgründe, Wirtschaftswoche, No. 8, 21 February 2011, p. 35. In the German daily Süddeutsche Zeitung he put the entire volume of the TARGET liabilities of Greece, Ireland, Portugal, and Spain at €340 billion at the end of February 2011. Moreover, he pointed out that if these countries should exit the Eurozone and declare insolvency, Germany's liability risk would amount to 33% of that sum, or €114 billion, relating these sums to the other rescue facilities of euro countries and the International Monetary Fund. Before he made them public, TARGET deficits or surpluses were not the subject of major public attention even though they were disclosed by Eurosystem central banks.Sinn, Hans-Werner, Tickende Zeitbombe, "Süddeutsche Zeitung", No. 77, 2 April 2011, p. 24.
Shortly thereafter, Sinn interpreted the TARGET balances for the first time within the context of current account deficits, international private capital movements and the international shifting of the refinancing credit that the national central banks of the Eurosystem grant to the commercial banks in their jurisdiction. He proved that the ECB system compensated the interruption and reversal in capital flows triggered by the 2008 financial crisis by shifting refinancing credit among national central banks. The increase in TARGET liabilities is a direct measure of net payment orders across borders, i.e. of the portion of the current account deficit that is not counterbalanced by capital imports, or, equivalently, the sum of the current account deficit and net capital exports. Indirectly, they also measure a country's amount of central bank money created and lent out beyond what is needed for domestic circulation. Since every country needs a relatively steady amount of central bank money for its domestic transactions, payment orders to other countries, which reduce the domestic stock of money, must be offset by a continuous issuing of new refinancing credit, i.e., the creation of new central bank money. Similarly, the increase in money balances in the country whose central bank honours the payment orders reduces the demand for fresh refinancing credit. Hence, a country's TARGET liabilities also indicate the extent to which its central bank has replaced the capital markets to finance its current account deficit, as well as any possible capital flight, by creating new central bank money through corresponding refinancing credit. Sinn illustrated that from an economic perspective, TARGET credit and formal rescue facilities serve the same purpose and involve similar liability risks.Sinn, Hans-Werner, Die riskante Kreditersatzpolitik der EZB, Frankfurter Allgemeine Zeitung, No. 103, 4 May 2011, p. 10.Sinn, Hans-Werner, Target-Salden, Außenhandel und Geldschöpfung, ifo Schnelldienst 64, No. 9, 2011. Sinn's presentation on 19 May 2011 at the Munich Economic Summit motivated an op-ed column in the Financial Times. They reconstructed the data on the basis of the balance sheets of the Eurosystem's national central banks and the balance-sheet statistics of the International Monetary Fund.