What is TARGET2?

Trans-European Automated Real-time Gross Settlement Express Transfer System (version 2)

It's A Hierarchical Thing

TARGET2 is a system of bank clearing across borders within the Eurozone, where National Central Banks (NCBs) intermediate.

It would not be all that much different if the banks of Europe all directly engaged each other… except… these commercial banks don't both have an account in the same NCB's book, so recording a transaction in there is impossible. TARGET2 is accounting at the next level up in the hierarchy of the monetary system.

In this respect, TARGET2 at the ECB serves a similar purpose to the clearing system of the Federal Reserve Banks in the US, where each Eurozone nation (and its local NCB) is to some extent analogous to the regional Banks of the Federal Reserve system. A bank domiciled in the San Francisco Fed's region has an account at the San Francisco Fed. A bank domiciled in the New York Fed's region has an account at the New York Fed. Any transfers between these two banks are executed by clearing at the Federal level (in aggregate, along with all other transactions), not within the books of just one of the local Fed member banks.

Similarly, any transfers between a bank domiciled in the Eurozone and one domiciled in the US will clear at the next level up in the hierarchy - via the accounts of the two Central Banks (ECB and Fed) at the Bank for International Settlements (BIS). This is the top level of the global monetary system hierarchy. Unless we start trading with aliens, that is probably all we will ever need right?

So we have:

• BIS
• Central Banks (ECB, Fed, BoE, BoJ, PBoC, etc, etc)
• In the Federated systems, US Fed & ECB, regional/national CBs present an additional layer
• Then you have the commercial banks
• Then you finally have the accounts of individual businesses and individuals

Your monetary transaction will show up at whatever is the lowest level, that there is commonality between you and your fellow transactor. If you are both within the US but in different regions, it will go up to the Federal level. If you are both in the Eurozone but in different countries, it will again go up to the Federal level.

TARGET2 is just the system within the Federated ECB level, where the account credit/debit balances of the various member Central Banks of the Eurozone are recorded.


^{Move along, there's nothing to see here.}