TARGET2 (Trans-European Automated Real-time Gross Settlement Express Transfer System) is a real-time gross settlement (RTGS) system for the euro that is operated by the Eurosystem, which consists of the European Central Bank (ECB) and the national central banks of the countries that have adopted the euro.

 

A TARGET2 account is an account held by a participant in the TARGET2 system, which can be a central bank, a commercial bank, or another financial institution. The account is used to facilitate the settlement of payment transactions in the euro, including interbank transfers, payments between central banks, and cross-border payments within the euro area.

 

TARGET2 accounts play a key role in the financial infrastructure of the euro area by providing a secure and efficient means for the settlement of euro-denominated payments. Participants in the TARGET2 system are required to have a TARGET2 account in order to access the system and participate in the settlement of payments.

In addition to the TARGET2 system, there are also other RTGS systems in the euro area, such as TARGET Instant Payment Settlement (TIPS), which is used for the settlement of low-value, high-volume payment transactions.

 

The importance of TARGET2

TARGET2 is a critical component of the financial infrastructure of the euro area, and is used to settle a wide range of payment transactions, including those related to trade, financial markets, and public sector operations. The system is designed to be highly reliable and secure, with strict risk management and settlement rules to ensure the smooth and efficient settlement of payments.

 

In order to use the TARGET2 system, financial institutions must have a TARGET2 account, which is an account held at the ECB or a national central bank. Participants in the TARGET2 system are required to follow certain rules and procedures, including maintaining sufficient balances in their TARGET2 accounts to cover their payment obligations.

 

Overall, the TARGET2 payment system plays a vital role in the financial system of the euro area by providing a secure and efficient means for the settlement of euro-denominated payment transactions.

 

TARGET2  problems

One issue that has been discussed in relation to TARGET2 is the possibility of imbalances in the system, which can arise when some participants have large net payment positions (either positive or negative) relative to others. These imbalances can be caused by a variety of factors, including differences in the creditworthiness of participants, variations in payment flows, and the use of the system for liquidity management purposes.

 

Some have argued that these imbalances could pose a risk to the stability of the financial system, particularly if they were to become large and persistent. However, the Eurosystem has implemented various measures to mitigate these risks, including setting limits on the size of net payment positions and requiring participants to maintain sufficient collateral to cover their payment obligations.

 

Another issue that has been raised in relation to TARGET2 is the potential for the system to be used as a conduit for illicit financial flows or for money laundering purposes. To address this concern, the Eurosystem has implemented a number of measures to prevent abuse of the system, including strict customer due diligence requirements, transaction monitoring, and cooperation with law enforcement agencies.

Overall, while TARGET2 has generally operated smoothly and reliably, there are some issues and concerns that have been raised about the system. However, the Eurosystem has taken steps to address these concerns and to ensure the stability and integrity of the system.

 

Difference between EURO1 and TARGET2

EURO1 and TARGET2 are two different payment systems that are used to facilitate the settlement of payment transactions in the euro.

  1. EURO1 was the original real-time gross settlement (RTGS) system for the euro, which was launched in 1998 when the euro was introduced as a currency. EURO1 was operated by the European Central Bank (ECB) and was used to settle interbank payment transactions in the euro, including cross-border payments within the euro area.
  2. TARGET2 is the successor to EURO1, and was launched in 2007 as part of the Eurosystem, which consists of the ECB and the national central banks of the countries that have adopted the euro. TARGET2 is also an RTGS system that is used to settle payment transactions in the euro, but it is more advanced and efficient than EURO1, and is capable of handling a higher volume and value of transactions.
  3. Some of the main differences between EURO1 and TARGET2 include:
  4. Coverage: EURO1 was only used to settle interbank payment transactions within the euro area, while TARGET2 is also used to settle payments between central banks and other public sector entities, as well as between private sector participants.
  5. Capacity: TARGET2 is designed to handle a higher volume and value of transactions than EURO1, and is equipped with more advanced technology and risk management systems

 

What is the difference between TARGET2 and SEPA?

TARGET2 is used to facilitate the settlement of payment transactions in the euro, including interbank transfers, payments between central banks, and cross-border payments within the euro area.

 

SEPA, on the other hand, is a framework for the standardization of euro payment transactions, which aims to make it easier and more efficient for individuals and businesses to make and receive payments in the euro. SEPA covers both credit transfers and direct debits, and allows for the use of a single bank account and payment instruments, such as bank transfers and direct debits, throughout the euro area.

 

While TARGET2 and SEPA are both related to the euro and the payment system in the euro area, they serve different functions. TARGET2 is a payment system that is used to settle payment transactions, while SEPA is a framework that aims to standardize and simplify the process of making and receiving payments in the euro.

Recommended for you

Navigating the iGaming Landscape: Key Challenges and Strategies for Success
08.07.24
Strikingly, the current failure rate for startups is 90%. In other words, 9 out of 10 new companies entering any given market will fail. The ones that remain share the secrets of success. The same is true for the iGaming industry. In this piece, we take...
EMIs and Customer Trust: Building a Reliable Digital Finance Ecosystem
08.07.24
How people perceive banking and payments in a digital-first world changes every couple of years. Electronic Money Institutions (EMIs) are central to this transformation. Yet, when any change happens, one thing remains vital—maintaining customer trust.   In this article, we explore how EMIs use several...
Interview with Interview with: Alexander Persidskyi - Head of Operations, PayDo
08.07.24
Interview with: Alex Persidskiy PayDo is an Electronic Money Institution (EMI) regulated in the UK and a licensed Money Services Business (MSB) in Canada. We provide financial services tailored to businesses, including multi-currency IBAN accounts, global payment processing, merchant services, mass payouts, and corporate card...