Conditions for the participation of non-euro area EU national central banks and credit institutions in TARGET
The Governing Council of the European Central Bank yesterday decided to grant access to TARGET to national central banks (NCBs) and participants in real-time gross settlement (RTGS) systems operating in euro but located in non-euro area countries of the EU. This decision shows innovation since no central bank so far has granted access to settlement facilities to institutions located outside its currency jurisdiction.
Following the decision taken, the non-euro area NCBs will be able to offer intraday liquidity in euro to their credit institutions on the basis of a deposit in euro with the ESCB. The amount of such a deposit will be fixed for each of them. The intraday liquidity they will provide to credit institutions connected to TARGET will also be subject to a ceiling. The collateral required to secure the intraday credit position in euro will have the same quality standards as the assets eligible in the euro area.
Participation in TARGET will be designed in such a way as to give the ECB assurance that non-euro area credit institutions will always be in a position to reimburse intraday credit in due time, thus avoiding any need for overnight central bank credit in euro. Safeguards will be based on the intraday credit being capped, on an early liquidity deadline and on a system of penalties in the event of a failure to reimburse the intraday credit.
Details are spelled out in the Annex.
ANNEX - The following conditions are offered by the ECB to the non-euro area NCBs for the provision of intraday liquidity to the non-euro RTGS system participants in TARGET
1. Conditions with respect to the non-euro area NCBs
- No overdraft vis-à-vis other NCBs
- Deposit with the ESCB (as part of their foreign exchange reserves) - ceiling: EUR 3 billion for the Bank of England and EUR 1 billion for other non-euro area NCBs; - remuneration: at the ESCB's deposit facility rate (no remuneration above the ceiling).
2. Conditions with respect to non-euro area credit institutions
- Collateralised intraday credit from their NCB -ceiling: EUR 1 billion maximum; -5 p.m. deadline: after 5 p.m. credit institutions can only make payments out of positive balances.
- Penalty rate for spillovers: 5% over the marginal lending rate.
- Remuneration of balances with the NCB: to be set between 0% and the rate of the ESCB's deposit facility.
- Collateral: same quality as the ESCB eligible assets. The collateral could be introduced in the tier two list of all NCBs with the risk borne by non-euro area NCBs.
The participation of non-euro area national central banks and credit institutions in TARGET
During the last decade, central banks world-wide have developed real-time gross settlement (RTGS) systems as a way to reduce systemic risk in payment systems. In 1995 the Council of the European Monetary Institute (EMI) agreed that all EU national central banks (NCBs) would prepare themselves for connection to TARGET, as part of the preparatory work for Stage Three of Economic and Monetary Union (EMU). The issue of connecting the non-euro area RTGS systems to TARGET - and in particular the question of whether and how institutions outside the euro zone would have access to intraday credit -was referred to the Governing Council of the European Central Bank.
Unlike netting systems, where central bank money is used only to settle balances at the end of the day, in RTGS systems, like TARGET, central bank money is used continuously during the day to process payments item per item. Compared with netting systems, more central bank money is used, but the whole process is safer (intraday finality) and the transmission mechanism is more effective (real-time execution). Intraday credit from the central bank is a core feature of any RTGS system because the timing and the size of outgoing and incoming payments of participants do not match in the course of the day.
From a payment systems perspective, central bank liquidity has to be provided to the extent necessary to avoid delays in the execution of payment orders. In order to allow the ESCB to cover the risks involved in extending credit, access to intraday liquidity is subject to full collateralisation.
Yesterday's decision by the Governing Council of the European Central Bank meets both payment systems and monetary policy concerns, the latter being addressed by the safeguards to ensure that the amount of intraday credit is limited and does not spill over into overnight credit.
 Out of this deposit, the non-euro area NCBs can cover their intraday liquidity needs so as to be able to exchange payments with the other RTGS systems participating in or connected to TARGET.