Journal of Financial Market Infrastructures

Risk.net

Is this bank ill? The diagnosis of doctor TARGET2

Ronald Heijmans and Richard Heuver

ABSTRACT

This paper studies large value payment system transaction data to develop monitoring indicators for signs of liquidity problems at both market and individual bank level. Our data set ranges from 1999 to mid-2013. We investigate stressful events in the market, such as bankruptcies, nationalizations and takeovers of banks. Our results show that during the last months before the stressful event, first borrowing and then lending decreases to zero, borrowing rates exceed the lending rates, with a jump in the last few months before the event, use of intraday credit increases and use of the Eurosystem's lending facilities increases (if the headquarters of the bank is located in the Netherlands). Analysis at the system level shows that after the collapse of Lehman Brothers, the spread on the interest rates paid in the unsecured money market increased significantly. Besides, the Dutch banks overall deposited more liquidity into the Eurosystem than they used in open market operations.

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