Lending between National Central Banks

See the following contribution here from Hans-Werner Sinn.  It is certainly original but frankly alarmist.  It focuses on the fact that National Central Banks within the euro system are lending bilaterally to each other though without changing the monetary base as a whole.  Sinn jumps from there to draw apparently worrying conclusions:  that these are “forced capital exports”; that they are the counterparty to current account deficits and that “the PIGS would have had a hard time finding the money to pay for their net imports”.

There is not a scintilla of evidence that the private non-bank sector in the PIGS has lost access to normal European financial markets.  If the Bundesbank lends to the Central Bank of Ireland, it does not, in any sense, expand the availability of credit to the private non-bank sector in Ireland.  Similarly, German households and firms do not suffer a credit contraction.  This is, of course, because there is free movement of capital within the single currency area.

The second non-sequitur in Sinn’s article is the association of accumulated current account deficits in the PIGS with these bilateral loans.  Ireland has, of course, a current account surplus so the point is completely irrelevant to at least one of the PIGS.  Sinn notes that Italy has not availed of these inter NCB loans, despite its current account deficit, but mistakenly attributes this to virtuous policy on the part of the Italian authorities!  It is of course because Italy so far has not yet suffered from a banking or sovereign debt crisis.  And for no other reason.

My suspicion is that Target 2 credit is ultimately guaranteed by the ECB: that the Bundesbank loans to the Central Bank of Ireland should be considered as contingent items on the ECB balance sheet.  In short, that Target 2 credit is simply a mechanism for implementing ECB policy.  But I remain to be corrected on this.

18 replies on “Lending between National Central Banks”

@Professor Sinn

This ‘Irish Pig is Pondering’ why we bothered to pay back ~100% of risk capital to private German Banking System?_and still paying, as German private banking debt socialized on Irish Citizenry! Or were we ‘ordered to do so by ECB? Methinks there is a touch of the EuroSkeptic to Professor’s Sinn’s somewhat narrow rules-based ethnocentric pontifications … think I’d prefer a pint with Axel Weber! …. or a transfer of €40 billion from the Bundesbank for saving the D-m… er … Euro!

“Mario Draghi (the leading contender to take over the ECB this autumn) kept his central bank’s lending under tight control throughout the crisis.”

Since all Eurosystem’s Central Bank’s have had to accept identical collateral and were offering unlimited credit against such collateral, I don’t see how Mr. Draghi’s control had anything to do with how much credit was offered by the Banca d’Italia.

I suspect what Mr. Sinn doesn’t know about the Eurosystem’s operational framework could fill a large book, perhaps one like this one.


Where does this guy get off?

Of course, using terminology from the old days, Ireland had a massive capital account deficit for the past six months–thanks to a run on our banks–that has over shadowed any current account surplus we might have had. Therefore, we have had a balance of payments deficit that has had to be covered by somebody–and that is the Eurosystem.

But we know this. And the money went to our bank creditors (in Germany, etc.), as we were forced to do, and the Irish Government will ultimately have to repay it in some form (when the reckoning comes due).

Moreover, he might note that we actually ran a balance of payments surplus during most of the boom. Our current account deficits were exceeded by our massive capital account surpluses. Therefore, we were then contributing to the accumulation of reserves in the Eurosystem (that we are now using).

As regards the Pigs printing money, this guy should go back to school. But I fear that we will hear a lot more of this. He is just availing of an opportunity to say Pigs as often as possible.

The unstated fallacy of this entire analysis is that there are separate national central banks. There are not; there is only one European Central Bank, which has branches in each eurozone member state. Efforts to claim that, say, the Irish Central Bank is an independent organisation from the ECB are not tenable.

As to suggestion of “forced capital transfers”, this also seems to be a conclusion drawn from a very narrow minded nationalistic mindset. Capital is overall being transferred _out_ of Ireland at an alarming rate to other European countries. This deposit flight presents a problem to the Irish branches of the European banking system, which has required the ECB to shift its assets between its branches in response.

Ireland in fact has a balance of trade surplus, and would be well able to pay for itself if the ECB has not decided to adopt a policy of converting bank crises into sovereign debt crises whenever they emerge.

The author’s extensive use of the acronym PIGS (I actually endorse this acronym), belies the narrow minded economic nationalism behind this piece. The author is in denial of the collective responsibility for this banking crisis, and its resolution, among all European member states, not just the PIGS economies. In a single market, single currency economy, it makes no sense to talk about capital imports, exports or otherwise. There is only one eurozone, and only one banking crisis.

A very interesting piece. I accept KW’s argument that NCBs do not adopt a policy, they apply the rules. Thus there is no question of the Itialian NCB having behaved responsibly, that is silly.

Nonetheless, consider what would have happened if Greece was still on the Drachma. The banks may have borrowed as much as they like from the Greek NCB but the reality is that the Greek NCB would need to either run down FOREX reserves or borrow FOREX to meet the current account deficit. Under the currency union that is a much more painless exercise, the Greek NCB simply borrows from the ECB.

Ireland has a current account surplus but a massive, massive financial account deficit which again is only possible courtesy of the auomatic access of the ICB to ECB funding.


Here’s some reference:

GUIDELINE OF THE EUROPEAN CENTRAL BANKof 26 April 2001on a Trans-European Automated Real-time Gross Settlement Express Transfer system (Target)(ECB/2001/3)  Article 4 Interlinking Provisions (b) 1 :

The ECB and each of the NCBs shall open an inter-NCB account on their books for each of the other NCBs and for the ECB. In support of entries made on any inter-NCB account, each NCB and the ECB shall grant one another an unlimited and uncollateralised credit facility

The Annual Accounts of the ECB 2009 on Page 9:

Intra-ESCB transactions are cross-border transactions that occur between two EU central banks. These transactions are processed primarily via TARGET2 – the Trans-European Automated Real-time Gross settlement Express Transfer system – and give rise to bilateral balances in accounts held between those EU central banks connected to TARGET2. These bilateral balances are then assigned to the ECB on a daily basis, leaving each NCB with a single net bilateral position vis-à-vis the ECB only. This position in the books of the ECB represents the net claim or liability of each NCB against the rest of the ESCB

Brian woods II

Its only massive because we are paying fraudulent bills.

Do you ever ponder the absurdity of it all ? , the unnecessary complexity , the armies of men in London , New York and the other financial centers that we have to supply with real goods.
The Trillions of hours wasted by people who are trying to game the system and survive, thus wasting countless time and energy when they could be doing something more productive.

The entire financial confetti complex is a sick joke with only the most peverse getting a laugh out of this strange comedy century.

The Venetian banking system is a pox on humanity Brian – free yourself from its corpulence.

The debate is in the first instance about European politics. The US was a country without a central bank until 1913, the ECB is a central bank without a country (sovereign) and this situation is unlikely to change in the immediate future.

What Winkler argues is that the ESM, if properly structured, can act as a surrogate for the missing sovereign. The ECB seems to share this view on a careful reading of its formal opinion.


This is what the political and economic establishment in Germany resolutely refuses to accept. The idiosyncratic article by Sinn is just another manifestation.

P.S. I have just noticed that the ECB opinion was published on St. Patrick’s Day. Herewith the link to the Winkler paper “The joint production of confidence” in case anyone has missed it.


It is to be hoped also that a reading of the ECB opinion will underline the fact that the EU consists of a democratic system of checks and balances between the governments of the Member States, their parliaments and the institutions of the EU of which the EU is one, not a monolith as portrayed by the Irish media.

@ Edgar Morgenroth

Well, it is a relief to learn that academic twaddle is not confined to Ireland.

According to Michael Hennigan on another thread, at his press conference in Helsinki, Trichet said the level of commitment of the Eurosystem to Ireland, has no precedent.

‘The facts speak by themselves.’

They, unfortunately, do and can be traced directly to the breakdown in political confidence that Germany will do what is actually required to restore the belief in the markets that no sovereign in the euro area will default. It is this fear that risks making nationally supervised banks in Greece, Ireland and Portugal – and wider afield – inoperable. This requires a mutualisation of credit risk between the governments of the euro area short of the issuing of eurobonds. Only an ESM with the necessary flexibility and instruments can do this.

The choice is now clear. Trichet, by indicating today that there will be no change in rates before the new man takes over, has provided a window of opportunity. On past evidence, there is every likelihood that Merkel, Schaeuble (and the FDP) will cock it up once again.

It occurs to me that it might be useful to insert at this point the link to the presentation by Trichet to the European Parliament on 21 March 2011.


The following extract in relation to his rejection of the idea of eurobonds is of particular interest.

“Jointly guaranteed bonds would not permit savers and investors to assess fiscal policies of individual countries. As long as we do not have a political federation with a federal budget, this would create an incentive problem. It would impair the incentives for fiscal prudence at the domestic level.

Consequently, Eurobonds would be the natural counterpart if national fiscal competences were clearly at the level of a union which would be a federation. In the present institutional framework we need to make very important progress in the collegial governance and surveillance of fiscal policies which remain national”.

It has also to be borne in mind that the ESM has to be translated into international treaty language by June (a treaty disputes in respect of which between governments are to be referred to the European Court of Justice!)

“My suspicion is that Target 2 credit is ultimately guaranteed by the ECB: that the Bundesbank loans to the Central Bank of Ireland should be considered as contingent items on the ECB balance sheet. In short, that Target 2 credit is simply a mechanism for implementing ECB policy. But I remain to be corrected on this.”

I think you’re right on this. This paper was linked to in Sinn’s comments and the author too seems to be saying that we’re dealing with a single organism here:


The author probably has a point regarding the default risk though. In this he seems to be in agreement with the Bundesbanke document linked to above:


“An actual loss will be incurred only if and when a Eurosystem counterparty defaults and the collateral it posted does not realise the full value of the collateralised refinancing operations despite the risk control measures applied by the Eurosystem.”

Comments are closed.