10 January 2013

Christian Thimann: Banking union should ease Target fears

There is an intense though often technical debate about the large balance sheet positions of the euro area’s national central banks (NCBs). These positions are known as “Target balances” after the settlement system through which payments are managed across the single currency area. In the debate, launched by German economist Hans-Werner Sinn, rising imbalances in the Target system have been criticised as reflecting unwarranted external financing for stressed nations and hidden risks for other countries...

There are, however, two important differences between direct claims on domestic banks and Target claims. The first is that for certain operations, the collateral underlying Target claims can differ from the collateral underlying domestic claims. In some circumstances and with the agreement of the governing council, NCBs can temporarily provide liquidity against special collateral. Those operations, which are time-bound as they are crisis-related, are one important difference.

The second is of a structural nature: information and the supervisory remit over commercial banks are confined to national borders. With domestic claims, an NCB has direct information on the banks and, if it is also the national supervisor, virtually full information. Such information is not yet available for monetary policy operations originated by other NCBs and appearing under Target claims.

A single supervisory system for the European banking sector – in which all NCBs are fully involved – will fill this information gap. It will create a situation in which, say, the Bundesbank will be able to know as much about a commercial bank in Spain as about a commercial bank in Germany. By giving NCBs with Target claims full information and supervisory remit over the banks from which these claims originate, the establishment of a banking union in Europe should help to ease concerns over Target balances.

A single supervisor should also strengthen trust among commercial banks in different parts of the euro area. This is a crucial step towards restarting the interbank market and overcoming financial fragmentation that is at the source of large imbalances in the Target system. That is why the establishment of a banking union is so important both for specific concerns about Target balances and the broader context of Europe’s economic situation.

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