Policy Article

TARGET (im-)balances at record level: Should we worry?

Target2 balances have re-increased since late 2014 in parallel with extraordinary  monetary policy measures. At first glance, the ECB’s asset purchasing programme seems to contribute just mechanically to a widening of Target2 positions. However, excessive liquidity provision reduces the role of cross-border interbank markets, which could otherwise reduce Target2 imbalances. Also, other factors like heterogeneous country risk may also continue to play a role, but are concealed in the current monetary policy environment.After categorising the root causes of Target2 imbalances (current account financing, capital flight,or deposit flight) and the associated risks, we discuss possible reforms that would prevent the build-up of large Target2 imbalances.