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 article More by this author

Blog Post

The DSGE Model Quarrel (Again)

Dynamic Stochastic General Equilibrium models have come under fire since the financial crisis. A recent paper by Christiano, Eichenbaum and Trabandt – who provide a defense for DSGE – has generated yet another wave of reactions in the economic blogosphere. We review the most recent contributions on this topic.

By: Silvia Merler Topic: European Macroeconomics & Governance, Global Economics & Governance Date: December 11, 2017
Read about event More on this topic

Upcoming Event

Dec
13
11:00

Better policies for people on the move

This event will feature the launch of a new Bruegel study on the impact and integration of migrants in the European Union.

Speakers: Manu Bhardwaj, Elizabeth Collett, Zsolt Darvas, Eva Degler, Maria Demertzis, Arjen Leerkes, Rainer Münz, Matthias Oel, Alessandra Venturini and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic More by this author

Blog Post

Sovereign Concentration Charges are the Key to Completing Europe’s Banking Union

The past crisis revealed that most euro-area banks have disproportionate sovereign exposure in their home country. Charging banks for sovereign concentration is one solution to this issue, and would help advance the discussion on banking union.

By: Nicolas Véron Topic: European Macroeconomics & Governance Date: December 7, 2017
Read about event More on this topic

Past Event

Past Event

Health care and macro-economics in Europe

What are the strengths and challenges of health care systems in each EU country? What are the common policy priorities and opportunities for EU value added?What role do healthcare systems play in public finances and macroeconomic developments? What are the economic values of investing in healthcare?

Speakers: Zsolt Darvas, Caroline Costongs, Per Eckefeldt, Sylvain Giraud, Petra Laux and Xavier Prats Monné Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: December 7, 2017
Read article More on this topic

Blog Post

Promoting intra-regional trade in the south of the Mediterranean

Regional integration is still a sure way for economies in development to achieve economic growth on the global market. The south of the Mediterranean has still a low level of intra-regional trade integration, dominated by some overlapping trade agreements and political instability. The EU has the opportunity to play a decisive role, promoting and coordinating the process.

By: Filippo Biondi and Maria Demertzis Topic: European Macroeconomics & Governance Date: December 6, 2017
Read article More on this topic More by this author

Blog Post

The eurozone medley: a collection of recent papers on the future of euro-area governance

Our scholars Grégory Claeys, André Sapir, Dirk Schoenmaker, Nicolas Veron and Guntram B. Wolff, explore the next steps needed to create a more functional and coherent economic governance framework.

By: Bruegel Topic: European Macroeconomics & Governance Date: December 6, 2017
Read article More on this topic More by this author

Blog Post

How the EU has become an immigration area

Natural change of EU28 population (the balance of live births and deaths) has fallen from high positive values in the 1960s to essentially zero recently, while the previous close-to-zero net immigration has turned positive and, since the early 1990s, become a more important source of population growth than natural increase

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: December 6, 2017
Read article More by this author

Blog Post

The European Union with the Community of Latin America and the Caribbean: where do we stand?

Latin American and Caribbean countries have deep historical, political, cultural, and economic ties with Europe, and cooperation between the two regions has been intensifying recently. Here we report some of the main trends in trade, foreign direct investment, and agreements between the European Union and The Community of Latin American and Caribbean States, the European Union’s official counterpart in the bi-regional strategic partnership that commenced in 1999.

By: Francesco Chiacchio Topic: European Macroeconomics & Governance, Global Economics & Governance Date: December 5, 2017
Read article More by this author

Opinion

EU should pay member states to get rid of coal

The European Union should act to ensure the continued transformation of its energy system, and encourage member states to overcome their dependence on coal for supplying electricity. Helping coal-mining regions with the transition should require €150 million per year – a mere 0.1% of the total EU budget – and the EU would not even need to establish a new fund to support it.

By: Simone Tagliapietra Topic: Energy & Climate, European Macroeconomics & Governance Date: December 5, 2017
Read article More on this topic More by this author

Opinion

The European Commission should drop its ill-designed idea of a finance minister

Beyond the opposing ideas of Jean-Claude Juncker and Wolfgang Schäuble for future euro-area governance, Guntram Wolff explores how alternatives such as a reformed Eurogroup might yield more effective fiscal policy-making.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: December 4, 2017
Read about event More on this topic

Past Event

Past Event

Flexicurity and labour market reforms in Europe

This event will discuss the potential of the flexicurity model as employment strategy and the way it could be implemented in European countries to be successful.

Speakers: Grégory Claeys, Philip Collins, Werner Eichhorst, Antoine Foucher, Maria Jepsen and Marco Leonardi Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: December 4, 2017
Read article Download PDF More on this topic More by this author

Policy Brief

Beyond the Juncker and Schäuble visions of euro-area governance

Two diametrically opposed visions of the euro-area architecture have been put forward. Departing from both Juncker’s and Schäuble’s proposals, the author identifies new ideas to develop the euro-area governance

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: December 1, 2017
Load more posts