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 Topic: European Macroeconomics & Governance

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.


Warning: Invalid argument supplied for foreach() in /home/bruegelo/public_html/wp-content/themes/bruegel/content.php on line 449
View comments
Read about event More on this topic

Past Event

Past Event

For a stronger and more integrated Europe

This event will feature the presentation of the Economic Survey of the European Union 2018 and Economic Survey of the Euro Area 2018.

Speakers: Angel Gurría, Zsolt Darvas, Pierre Beynet and Aida Caldera-Sanchez Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: June 19, 2018
Read article More on this topic

Blog Post

Understanding (the lack of) German public investment

An array of data suggests that there is a general lack of investment by all branches of the German government, despite running budget surpluses for several years. This blog post plots the progression of the public investment problem, and explores which regions, which sectors, and which levels of government have been most affected.

By: Alexander Roth and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: June 19, 2018
Read about event More on this topic

Upcoming Event

Jun
27
12:30

Euro tragedy: a drama in nine acts

This event will feature a presentation by Ashoka Mody of his new book, which argues that the Euro is at the root of the problems the European Union faces today.

Speakers: Maria Demertzis, Ashoka Mody and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event More on this topic

Upcoming Event

Jul
2
12:00

Assessing the EU’s fiscal architecture: a presentation by the European Fiscal Board

This event will discuss the 2019 Fiscal Stance, which assesses the current macroeconomic situation and offers advice for the future.

Speakers: Niels Thygesen, Agnès Bénassy-Quéré and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event More on this topic

Upcoming Event

Jul
11
09:30

Understanding Italy: challenges and perspectives in the European context

This is an invitation-only workshop to discuss Italy’s economic and political challenges and what lies ahead

Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article Download PDF More on this topic

Policy Contribution

Is the European Semester effective and useful?

The authors study whether and to what extent EU countries implement recommendations on macroeconomic imbalances given by the EU in the so-called European Semester. Overall implementation of recommendations by EU countries has worsened in the last few years, in particular when it comes to recommendations addressed to countries with excessive macroeconomic imbalances.

By: Konstantinos Efstathiou and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: June 13, 2018
Read article More on this topic More by this author

Opinion

« Mieux vaudrait laisser les gouvernements libres de tenter les politiques de leur choix »

Les peuples ont le droit de faire des erreurs: Selon l’économiste Jean Pisani-Ferry, l’Union européenne doit accepter les aspirations légitimes à des politiques disparates, tout se prémunissant contre la contagion de leur corollaire : la possibilité d’une faillite souveraine.

By: Jean Pisani-Ferry Topic: European Macroeconomics & Governance Date: June 12, 2018
Read article More on this topic

Blog Post

Is the ECB collateral framework compromising the safe-asset status of euro-area sovereign bonds?

Central banks’ collateral frameworks play an important role in defining what is considered as a safe asset. However, the ECB’s framework is unsatisfactory because it is overly reliant on pro-cyclical ratings from credit rating agencies, and because the differences in haircuts between the different ECB credit quality steps are not sufficiently gradual. In this note, the authors propose how the ECB could solve these problems and improve its collateral framework to protect its balance sheet without putting at risk the safe status of sovereign bonds of the euro area.

By: Grégory Claeys and Inês Goncalves Raposo Topic: European Macroeconomics & Governance Date: June 8, 2018
Read article More on this topic More by this author

Opinion

Trägt Deutschland eine Mitschuld an Italiens Krise?

Italiens Regierung will riesige neue Schulden machen – die nächste Bewährungsprobe für die Eurozone. Deutschland muss sich aktiv an der Lösung beteiligen.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: June 6, 2018
Read about event More on this topic

Past Event

Past Event

News from the South. Proposal to strengthen the European Monetary Union: Combining fiscal discipline with risk sharing

On 4 June Bruegel, as in previous years, will host the presentation of the Euro Yearbook, a collection of experts’ insights on the construction of the European Monetary Union through 2017.

Speakers: Cristina Cabrera, Maria Demertzis, Fernando Fernandez, Massimo Giuliodori, Javier Méndez Llera and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: June 4, 2018
Read article More on this topic More by this author

Blog Post

The Italian Crisis

While Italy has been through one of the gravest institutional crises in its history, we review recent opinions on the topic.

By: Silvia Merler Topic: European Macroeconomics & Governance Date: June 4, 2018
Read article More on this topic More by this author

Opinion

Mattarella’s line in the sand

The vital task confronting Europe is to reconcile citizens’ right to make radical choices with the need to ensure that decisions leading to constitutional change are subject to sufficient public deliberation. The EU and the euro must not be constitutional cages; but nor should they be subject to ill-considered decisions.

By: Jean Pisani-Ferry Topic: European Macroeconomics & Governance Date: June 1, 2018
Load more posts