With the exception of labelling the Irish central bank as the “Bank of Ireland”, this CEPS note is an excellent primer on the Target2 debate.
With the exception of labelling the Irish central bank as the “Bank of Ireland”, this CEPS note is an excellent primer on the Target2 debate.
12 replies on “TARGET2 Unlimited: Monetary Policy Implications of Asymmetric Liquidity Management within the Euro Area”
I’ve heard the phrase that Germany is one of the largest beneficies of the euro area many times now, and I think it’s a load of cobblers.
Germany’s export sector benefits from being so grossly undervalued but the average German citizen has his spending power greatly reduced by artificially expensive imports.
Exports are not the only source of growth, and the German economy would have far more reliable growth prospect were it to revalue. Relying on export growth alone has not given Germany all that impressive growth rates over the last decade, and its potential growth rate is calculated at between 1-1.3%, a truly meager figure for such an advanced economy.
Aside from German exporters, and a political elite who like to make grand gestures, I’m not sure that the euro has really benefitted the average German at all, in fact I would argue that it has done the opposite.
Oops, comment in wrong thread!
I know it was a simplified model but this is the clearest I have seen yet that the capital flight is in fact German banks reversing earlier exports of capital to Ireland. Thus it is not really the citizenry or even corporates causing this flight. And it is definitely not as Sinn argues Ireland funding its deficits by the backdoor.
The ways to reverse the imbalances are 1) deleverage the Irish banks by selling assets to foreigners and 2) recapitalising Irish banks to such an extent that they are seen as bomb proof.
These are the official strategies as I understand it. It is also important that lending to the BB is less remunerative than lending to Irish banks. The note argues that Target2 currently acts to make repatriating loans from Irish banks a “free lunch”.
I cannot say that I have read the above referenced paper in detail and if I did I may not understand it. That said I am heartily sick of this Target2 business.
Fundementally why is a Target2 necessary at all?
It seems to be necessary because we have ‘European (EZ) ‘ citizens free to transfer their money and put it into any bank in any EZ country.
But, hey presto, as soon as that happens by some magic of Target2 the money becomes the ‘property’ of the country in which the receiving bank resides.
And as if that was not bad enough, we get the likes of Professor Sinn telling us that all the citizens of Ireland should then pay hard cash to Bundesbank or other central bank just because a wealthy Irish person transfers his money to Germany.
How about a Target3 balance which measures the amount of deposits of Irish or Greek or other PIIGS’ citizens in ‘German’ banks. And then we can offset Target2 against Target3.
That sound a little fairer.
Or how about if EZ wide capital controls that prevent citizens or companies from having acoount other than in the juristiction area of their own central bank.
@Joseph Ryan
“How about a Target3 balance which measures the amount of deposits of Irish or Greek or other PIIGS’ citizens in ‘German’ banks. And then we can offset Target2 against Target3.”
Er, the netting effect does that – what you’re seeing is the flow of funds to Germany which previously flowed into Ireland (creating at a time a large debit for Germany and a large credit for Ireland). We then, eh, spent that so that the net balance went back to zero. Then all the deposits (whether Irish or German, but mostly German) wanted to leave…
I’m reasonably sure, though, that a good portion of the balance is what Depfa pissed away on HRE’s behalf. I’ve no real proof of this other than the logic that goes:
HRE buys Depfa.
HRE transfers money to Depfa.
Depfa ‘invests’ it around the world (so ex-eurozone).
Depfa goes massively bust and transfers its obligations back to HRE.
The German government bungs 100bn at HRE.
In the normal course of events, the Depfa ‘investments’ would have repaid themselves and returned the money to Germany.
You can add in the Dublin-based SIVs of Sachsen and the rest.
No?
@Hogan
re: Target2
My understanding is that if all Irish people with deposits took their money out of Irish banks (say €100 billion) and lodged in Deutsche Bank, Frankfurt then, the following happens.
1. The money is not physically transferred to Deutsche.
2. Deutsche (or the BuBU, not clear which) becomes a ‘debtor’ of the Target2 system for €100 billion.
3. This Target2 balance is not ‘settled’ by any cash transfer.
4. It is in effect as if the depositor has suddenly become a German citizen with Deutsche holding a claim against Target2 on his behalf.
In other words my understanding is that the Target2 balance increase of the German banks is not just because of a trade surplus, but is also heavily influence by ‘bank runs’ in the peripherals.
Therefore peripheral bank runs or bank deposit flight benefits core country banks enormously but we never seem to hear of this from Prof Sinn.
The banks it would appear are national property when losing money.
The citizens are national in so far as all of them pick up the tab for bank losses.
But the core banks have no restriction on them from ‘poaching’ deposits from the peripheral countries banks even though the subsequent problems of the peripheral banks will be visited on the citizens of the perpheral countries, with no recourse to the ‘lost’ deposits.
Not only that but Prof Sinn wants to be able to put a triple lock on those lost deposits via a cash or gold transfer.
Perhaps I just don’t understand all this but the above is my understanding of some aspects of Target2.
@Joseph Ryan
“But the core banks have no restriction on them from ‘poaching’ deposits from the peripheral countries banks even though the subsequent problems of the peripheral banks will be visited on the citizens of the perpheral countries, with no recourse to the ‘lost’ deposits.”
Ah come on. Most of the Target2 deficit that Ireland has is the result of ‘poached’ German deposits being repatriated when our banks hit the loo. Seamus Coffey has some posts on his site on the nature of the deposit flight.
There is no such thing as paper cash movements, it is all electronic – a debit on our side, a credit on the German side. That is a cash transfer. When you pay your credit card bill by direct debit, you don’t expect your bank to run around to the credit card company with a brown envelope stuffed with notes, do you?
@Hogan
If you are correct in this, then my humble apologies.
Still, there is significant anecdotal evidence of deposit flight by ‘native’ Irish citizens. Whether this money ends up in London, Paris, or Frankfurt, I do not not know.
I must look up some of S Coffey posts on the subject.
I would not have a lot of confidence in the statistical source data in this area to capture the nationalities or the ordinary residences of the people moving the deposits. The larger movers would certainly be able to set up companies in EZ to keep their their money.
As for the brown envelope bit, coming from the left side of the political spectrum brown envelopes are such a rare occurance that I would hardly recognise an empty brown envelope if I saw one. I have never seen a ‘full brown envelope’
And regretably I cannot afford to have a direct debit snatch the funds from my bank account to pay my credit card at a day not of my choosing, so I have to do with internet banking for that.
But the way today is going for the EZ banks (from another thread on this blog), the bankers may soon be putting the cash in bags and runnig around the corner with the cash to trade with each other.
Thanks again.
Reading the note, if the goal is to maintain the same overnight rate in all countries why not set the deposit rate and the marginal lending rate equal to each other and close the corridor? It would be similar to section 3.1 but with shorter duration liabilities issued by the central banks. Their objections seem to be
1) Increased credit risk borne by the Eurosystem
2) Decreased credit risk borne by German banks (“free lunch”)
In relation to (1), can someone explain what difference it makes if a central bank has negative capital? In relation to (2), didn’t this ship sail when Irish banks were given access to a LoLR?
Speaking of the corridor, the legend in Figure 6 is wrong.
Two more questions –
Why don’t Irish banks open up accounts at the Bundesbank?
Looking at Figure 2, as I understand it banks have accounts at NCBs and NCBs have accounts at the ECB. Why have a two tier Eurosystem instead of commercial banks having their reserve accounts at the ECB?
@Joseph Ryan
“But the way today is going for the EZ banks (from another thread on this blog), the bankers may soon be putting the cash in bags and runnig around the corner with the cash to trade with each other.”
😆
@Simon Twist:
“In relation to (1), can someone explain what difference it makes if a central bank has negative capital?”
decreased (or even negative) seigniorage income would mean, that the likelyhood of fiscal interferences may increase (conditioned recapitalization), leading to a higher inflation bias in the long term..
..in addition, setting the corridor to zero means completly substituting the interbank market. No bank would lend each other as. The result is a nationalized banking system.
Thanks.
What do you mean by seigniorage income? If it is income to the central bank i.e. their ability to purchase assets by crediting the reserve accounts of the sellers they could do this just the same with negative capital. If it is income to the government i.e. credits that the central bank makes to a reserve account of the government these could also continue as before. I don’t see how seigniorage income would have to change.
I would prefer to see the marginal lending facility removed but if it were available at the deposit rate I think banks would continue to lend to each other because there are other types of borrowing that they do apart from overnight borrowing of reserve balances.