TARGET2 balances and the adjustment of capital flows in the Euro area

Abstract

TARGET2 balances emerged from sudden stops in banking capital flows. The turnaround of the balances cannot be assigned to one particularly mechanism. Germany’s commercial banks withdrew their excess liquidity from the Bundesbank and paid back their liabilities against other banks which they had built up during the crisis. Greece and Portugal substituted their TARGET2 balances by bailouts, and Spain as well as Italy attracted most of their net capital inflows privately.