The ECB is replacing the Target 2 payment system with a successor

Dhe step had been postponed last year, among other things because of the “geopolitical uncertainty” but also all sorts of technical difficulties – now it was apparently carried out in the middle of the banking quake: The European Central Bank announced on Tuesday that the European payment transaction system Target 2, which among other things handles cross-border payment transactions between banks and central banks in the euro area, has been replaced by a successor.

The successor system is called “T2” for short. “The Eurosystem has successfully introduced the new T2 large payment system,” says the ECB statement: “The migration to the new system took place between March 17 and 20.” The first day of T2 operation is according to the ECB went smoothly despite a late closure, the cause of which had been identified and rectified.

Bundesbank: “Herculean task accomplished”

Bundesbank board member Burkhard Balz commented: “I am pleased that the migration to the new T2 system was successful. With the new system, the Eurosystem has secured a long-term, high-performance infrastructure for European payment transactions.” A Herculean task for the entire European banking community has been accomplished, said Balz: “After more than six years of intensive work, we have successfully put T2 into operation as the successor to Target 2 taken.”

Much discussion about risks of Target 2

The Target 2 system had repeatedly been the subject of discussions – among other things in relation to the high German balance. This was last at 1.1 trillion euros. A few years ago, there had been debates among economists about the question of whether losses could result if a country were to leave the euro. In general, the interpretation of the target balances was at least controversial.

Interest on the ECB’s liabilities to national central banks from the Target 2 system had recently weighed on the ECB’s annual financial statements. That was the result of the turnaround in interest rates.

The liabilities have something to do with the Eurosystem’s bond purchases in the past. And with the fact that commercial banks from all over the world hold accounts with the national central banks of the Eurosystem, but not with the ECB itself. So if a federal bond was bought by the ECB from an American commercial bank in the past few years, the payment for it was made, for example through an account with Federal Bank. The bond then found itself on the books of the ECB. The financing of the purchase, however, ran through the respective national central bank. The Target 2 system acted as a balancing item between the two central banks; the ECB subsequently had a liability from the target system to the national central bank on its books.

The net interest income of the ECB was around 900 million euros in 2022, after 1.566 billion euros in the previous year. The main reason was the interest expense for the Target 2 liabilities, which amounted to 2.075 billion euros. In the previous year, there was a small interest income of 22 million euros at this point.