TARGET2 (Trans-European Automated Real-time Gross Settlement Express Transfer System) plays a significant role in the stability of the eurozone. Incredibly, every five days TARGET2 processes a value close to the entire GDP of the euro area, which makes it one of the world’s largest payment systems.
But what does it actually do? Find out more about TARGET2, including how it works, which countries and organisations are involved, and the difference between SEPA and TARGET2.
So, what is TARGET2? Put simply, it’s a payment system – also known as a real-time gross settlement (RTGS) system – that is operated by Eurosystem (the monetary authority of the eurozone).
It’s the leading platform in Europe for processing large-value payments. TARGET, the precursor to TARGET2, was established in 1999 to accompany the introduction of the euro, before the implementation of TARGET2 in 2007.
TARGET2 is used by many central banks and commercial banks to process payments in euro in real-time, enabling the free flow of money across European borders and minimising system risk in the payments market.
The TARGET2 system plays a key role in safeguarding the financial stability of the euro area by ensuring that payments and market infrastructures continue to run smoothly.
How does TARGET2 work?
The process by which TARGET2 settles payments is relatively straightforward. Essentially, payment orders are submitted on the platform to be processed and are settled in central bank money. It can be used for interbank payments, monetary policy transactions, and commercial payments, and there aren’t any upper or lower limits to transaction value.
Here’s a step by step guide to settling a payment via the TARGET2 system:
Bank A makes a payment in euro to Bank B, both of which have accounts with a central bank.
Bank A then submits the payment instructions to TARGET2.
Following this, Bank A’s account will be debited, Bank B’s account will be credited, and the payment will be settled.
Finally, TARGET2 transfers the payment information across to Bank B.
It’s important to remember that the TARGET2 system is only open for processing payments on working days from 7am to 6pm (CET). It’s also closed on a number of holidays, including New Year’s Day, Good Friday, Easter Monday, Labour Day, Christmas Day, and Boxing Day.
Who are the TARGET2 participants?
It’s mandatory to participate in TARGET2 when settling euro operations that involve the Eurosystem – in other words, the European Central Bank and the national central banks of all 19 EU member states.
In addition, other financial institutions are able to connect to TARGET2 via participating central banks.
To see a full list of TARGET2 participants, take a look at this list on the European Central Bank’s website.
What’s the difference between SEPA and TARGET2?
There’s a key difference between SEPA and TARGET2, although they’re both important for payments in Europe.
But first, what is SEPA? SEPA is the Single Euro Payments Area, a European Union initiative designed to harmonise payments across the Eurozone. SEPA is intended to make European payments more affordable by creating a single market for all euro-denominated payments. To do this, three payment schemes have been created: SEPA Direct Debit, SEPA Credit Transfer, and SEPA Cards Framework.
So, what’s the difference between SEPA and TARGET2? Well, TARGET2 generally only deals with large-value payments, but that doesn’t solve the whole problem. There are also many issues with small payments, which are processed in very different ways across the eurozone. By giving customers the ability to make non-cash euro payments to anyone in the euro area with a single bank account and set of payment instruments, SEPA will help to create a more integrated and competitive retail market.
In a sense, therefore, SEPA is simply a development of the project begun by TARGET and TARGET2.
TARGET2 and Brexit
At the moment, there isn’t a clear answer on the future of TARGET2 and Brexit.
It’s possible that British banks may have their access to TARGET2 disrupted after Brexit. However, as the terms of the UK’s withdrawal from the EU have not yet been agreed upon, the effect of Brexit on TARGET2 remains unclear.
It’s possible that, as with SEPA, Britain will continue to use the TARGET2 system after Brexit.
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