What is TARGET2 and what function does it serve?
What is TARGET2
CONCEPT:
Modern economics relies on the safe and efficient flow of transactions. Payment systems provide the network that allows money to flow in the economy. One such payment system has been introduced by the Eurozone named TARGET2.
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Target 2 implies TRANS EUROPEAN AUTOMATED REAL TIME GROSS SETTLEMENT EXPRESS TRANSFER SYSTEM which is a real-time gross settlement system for the eurozone as well as for the non-eurozone countries. It is used every time when the euros are transferred within the European Union from one country to another. It is the leading European platform for processing large-value payments and is used by both central banks and commercial banks to process payments in euro in real terms. These transactions take place at the European Central Bank.
HOW DOES THIS SYSTEM WORK?
Target2 has a great role in the operations of money market operations. It is used for all payments involving the Euro system as well as for the settlement of operations of all large values net settlement and securities settlement systems handling the euro.
It is popular for its simplicity and the way it works efficiently and in a very smooth manner. Let’s have a look on how it works with the help of an easy and simple example:
• A man from Spain wants to purchase furniture from Finland.
• The Finland furniture manufacturer sends its package through its way.
• The purchaser has to pay the money to the national bank of Spain and then it goes to the European Central Bank.
• At the same time, the Finland manufacturer has to open an account for the money in Finland’s Bank which the bank communicates with European Central Bank representing him as will as Finland’s bank.
• This is when Target 2 enters the transaction and it transfers the money from 1 national bank to the other.
• The Bank of Finland sends the money to the Finland manufacturer account.
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PARTICIPANTS IN TARGET2:
The amount for daily transactions ends up to approx. 1.9 trillion Euros. The participants involved in the system of Target2 can be divided into two parts:
• Direct Participants
• Indirect Participants
The list of Target-2 participants is generated on the basis of the Target-2 directory that is valid on the first day of the current quarter. European Central Bank and the national central banks of the 19 European union member states that are part of the Eurozone. Participation in Target-2 is mandatory for new member states joining the Eurozone. Central Banks from 5 non-European states-: Croatia, Bulgaria, Denmark, Poland, and Romania also participate in Target-2.
AUTHOR: Bhagyashree Chandak
I aspire to become a Research Analyst and earn and use the best of my knowledge.
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