Blog Post

Target 2 of the ECB vs. Interdistrict Settlement Account of the Federal Reserve

The Target 2 discussion is still going strong in Europe especially after the president of the German Bundesbank has expressed his concern as regards the quality of the collateral held by the ECB and National Central Banks. Observers such as Hans-Werner Sinn have claimed that the US Federal Reserve had a fundamentally different (and presumably better and more stable) set up.  

By: and Date: March 6, 2012 European Macroeconomics & Governance Tags & Topics

The Target 2 discussion is still going strong in Europe especially after the president of the German Bundesbank has expressed his concern as regards the quality of the collateral held by the ECB and National Central Banks. Observers such as Hans-Werner Sinn have claimed that the US Federal Reserve had a fundamentally different (and presumably better and more stable) set up.

We revisit this argument with this interesting graph concerning the US Federal Reserve Interdistrict Settlement Accounts (ISA). It turns out the US also has its Target 2 imbalances.

Source: St. Louis FRED

But how can this be? The Federal Reserve accounting manual (p 136) stipulates how ISA balances should be settled:  Every year in April the average ISA balance over the past 12 months (April 1st – March 31st) is calculated and netted via transfer of gold certificates between reserve banks.

Apparently the rules of the accounting manual have not been followed. Since the beginning of the FEDs liquidity operations (22-9-2008, the vertical bar in the graph) the New York Fed has accumulated a large positive ISA account, while the Richmond and SF FED have accumulated a negative ISA account. These positions were not settled in April 2009, 2010 or 2011, although we see a jump -albeit insufficiently large – in April 2010. Of course, the amount netted in April should be the average ISA balance over the past 12 months, which will not be equal to the balance in April.

Why was ISA was not settled in April?  The Federal Reserve Board is required by law to maintain par between dollars issued by the reserve banks, but not to net out ISA settlements. In order to achieve the former, it has the authority to set settlement and clearing laws. According to Koning in this recent blog post on the history of the ISA the Federal Reserve Board might have decided not to net in order to prevent problems in Richmond or SF.

To give a perspective, Richmond Fed total assets are currently 210 billion USD, while its ISA liabilities are 134 billion USD. In relative size this is comparable to the Target 2liabilities of some Euro area members.  Interesting to note is that the Richmond and SF accounts are dominated by Bank of America and Wells Fargo. Bank of America is the largest commercial US bank. Its assets are 2,200 billion USD which is about the size of total assets of banks registered in Richmond Fed. Wells Fargo is the fourth largest bank in the US with total assets 1,258 billion USD. Total assets of banks registered at the SF Fed are 2,000 billion USD. There is also a precedent for this operation. Between 1917 and 1921 and in 1933 interdistrict claims were discounted.

The important difference between Target 2 and ISA, however, is that in the US all Reserve Banks are owned by the federal government. This means that in the US it is possible to safeguard the integrity of the system by changing the settlement rules. This is as exciting as a game of monopoly among friends. As all Federal Reserve banks are owned by the federal government, a loss in Richmond is irrelevant when there is an equal gain in New York. In the Eurozone, however, the ECB is owned by the national governments via the national central banks, not by the European Union as a whole. When one would change the settlement rules here – for example by discounting claims – this means a transfer across countries.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read article More on this topic More by this author

Opinion

Guntram B. Wolff

EZB-Chef Draghi enteignet die Sparer nicht

Die EZB reagiert mit ihrer Geldpolitik nur auf die schwache wirtschaftliche Lage. Sie ist nicht dafür zuständig, für hohe Renditen europäischer Sparer zu sorgen. Kapitalerträge hängen von guten wirtschaftlichen Strukturen ab - und für die sind andere verantwortlich.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: September 30, 2016
Read about event More on this topic

Upcoming Event

Oct
4
12:30

Potential impediments to long-term investment

How can we encourage long-term investment in Europe? Many factors hinder long-term investment but are there risks involved in reviewing existing regulation?

Speakers: Sophie Barbier, Grégory Claeys, Miguel Gil Tertre, Edoardo Reviglio and Sandra Rigot Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event More on this topic

Past Event

Past Event

Inclusive growth in the European Union

Why is inclusive growth important and how do the EU’s social problems differ from social problems in other parts of the world?

Speakers: Brando Benifei, Monica Brezzi, Bea Cantillon, Zsolt Darvas, Jana Hainsworth, Stefaan Hermans, Barbara Kauffmann, Dalia Marin, Tim Murphy, André Sapir, Reinhilde Veugelers, Luca Visentini and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: September 29, 2016
Read article More on this topic

Blog Post

André Sapir
Guntram B. Wolff

The Continental Partnership proposal: a reply to five main criticisms

The proposal for a Continental Partnership (CP) has received a great deal of attention. Two of the authors, André Sapir and Guntram Wolff, clarify some misunderstandings and respond to five key criticisms. They argue that the CP does not offer a way for EU members to restrict freedom of movement, nor is there a great risk of “political contagion”. Indeed, a CP arrangement could be the best route for the remaining EU members to maintain strong economic and security cooperation with the UK, while defending themselves against dumping and vetoes.

By: André Sapir and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: September 27, 2016
Read about event More on this topic

Upcoming Event

Oct
10
12:30

Financial Times/Bruegel European Forum: Where now for the UK and the EU after the vote for Brexit?

Three months after the results of the UK referendum there is still a lot of uncertainty about the future. The Financial Times and Bruegel bring together a panel to discuss the most crucial questions.

Speakers: Lionel Barber, James Blitz, Maria Demertzis, Sylvie Goulard and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article Download PDF More on this topic More by this author

Policy Contribution

pc15_16

Low long-term rates: bond bubble or symptom of secular stagnation?

Yields on European sovereign bonds have reached historically low levels in 2016. This secular decline in long-term sovereign yields is not limited to the euro area. Why are interest rates currently so low? Are low long-term trates justified by fundamental factors or is it an artificial phenomenon?

By: Grégory Claeys Topic: European Macroeconomics & Governance Date: September 26, 2016
Read about event More on this topic

Upcoming Event

Oct
13
08:30

The Euro and the battle of ideas

Why is the Euro in trouble? Are philosophical differences between the founding countries to blame and can those differences be reconciled?

Speakers: Markus K. Brunnermeier, Marco Buti, Maria Demertzis and Harold James Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article Download PDF More by this author

Parliamentary Testimony

written-evidence-house-of-lords-12-9House of Lords

The future of financial services in the UK following the Brexit vote

UK House of Lords EU Sub-Committee on Financial Affairs' call for evidence on the future of Financial Services in the UK following the vote to leave the European Union.

By: Dirk Schoenmaker Topic: European Macroeconomics & Governance, House of Lords, Parliamentary Testimonies Date: September 15, 2016
Read article More on this topic More by this author

Blog Post

Nicolas Véron

The City will decline—and we will be the poorer for it

Just as the City owes much of its current awe-inspiring prosperity to European integration, the brutal realities of Brexit will make it shrink, not thrive. All this is bleak news, not just for the City but for the UK's economy.

By: Nicolas Véron Topic: European Macroeconomics & Governance Date: September 14, 2016
Read about event More on this topic

Past Event

Past Event

From crisis management to launching economic growth

What have been the most effective strategies in limiting the impact of the economic crisis in Europe? What challenges lie ahead? Bruegel's 10th anniversary event in Budapest will foster discussion of these important topics.

Topic: European Macroeconomics & Governance Location: Budapest, Hungary Date: September 14, 2016
Read about event More on this topic

Upcoming Event

Nov
21-22
13:30

Vision Europe Summit 2016

The 2016 Vision Europe Summit is titled "Redesigning European Migration and Refugee Policy" and will be held in Lisbon on 21-22 November 2016.

Topic: European Macroeconomics & Governance Location: Lisbon
Read article Download PDF More on this topic

Policy Contribution

cover

What are the prerequisites for a euro-area fiscal capacity?

In this Policy Contribution, Maria Demertzsis and Guntram B. Wolff discuss three progressive steps for strengthening the fiscal framework at the euro-area level. These lead to less interference in national fiscal policymaking thanks to a more credible no-bailout clause, increased risk sharing and different degrees of provision of euro-area-wide public goods and fiscal stabilisation.

By: Maria Demertzis and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: September 9, 2016
Load more posts