TARGET (im-)balances at record level: Should we worry?

Target2 balances have re-increased since late 2014 in parallel with extraordinary monetary policy measures. At first glance, the ECB’s asset purchasing programme seems to contribute just mechanically to a widening of Target2 positions. However, excessive liquidity provision reduces the role of cross-border interbank markets, which could otherwise reduce Target2 imbalances. Also, other factors like hetero-geneous country risk may also continue to play a role, but are concealed in the current monetary policy environment. After categorising the root causes of Tar-get2 imbalances (current account financing, capital flight, or deposit flight) and the associated risks, we discuss possible reforms that would prevent the build-up of large Target2 imbalances.