Target-2 Masks Reduced Fragmentation
— July 12, 2018
By Kim Schoenholtz and Stephen Cecchetti
The answer is two-fold: for the first few years of the euro-area crisis – when German claims peaked at €750bn – imbalances reflected subsidised loans to counter rising financial fragmentation. Between 2008-12, funds shifted from banking systems in the periphery of Europe perceived to be under stress, to banks in the core seen as being relatively stable, creating a web of liabilities and claims among national central banks.
After 2012, the risk of breakup receded, so the interpretation of renewed increases in Target-2 balances has changed. Indeed, the doubling since early 2015 is a natural consequence of how the Eurosystem implements its various asset purchase programmes. Consequently, the impact of the APP expansion on Target-2 balances has concealed a further, if still incomplete, reversal of the financial fragmentation triggered by the euro area crisis several years ago.
Read the full OMFIF article.
Kim Schoenholtz is the Henry Kaufman Professor of the History of Financial Institutions and Markets in the Economics Department and Director of the Center for Global Economy and Business.