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Ten of every 100 euros paid via ECB would fall through in worst crisis: research

Tuesday, February 21, 2017 - 22:47

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Ten of every 100 euros sent through the European Central Bank's payment system would not reach their destination if the most extreme financial stress modelled in an ECB paper materialised.

[FRANKFURT] Ten of every 100 euros sent through the European Central Bank's payment system would not reach their destination if the most extreme financial stress modelled in an ECB paper materialised.

But under most scenarios, including one more severe than the crisis of 2008, the Target 2 system would hold up well, partly thanks to the unprecedented amount of liquidity being supplied under the ECB's asset purchase programme.

Published on Tuesday, the study by ECB and national euro zone central bank economists coincides with rising concerns about a possible new euro crisis, fuelled by calls for an exit from the currency union in Italy and France and drawn-out bailout negotiations in Greece.

Based on data from 2008 to 2013, the study into Target 2's resilience plotted an extreme scenario of a 70 per cent collapse in the value of banks' collateral.

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If the assets banks pledge to borrow cash fell by that amount, payments worth 238 billion euros (S$358.429 billion) would not be settled, the study found. That equates to 10.6 per cent of the turnover of Target 2, through which bank payments in the euro zone are routed.

A reduction in the value of collateral such as bonds and loan bundles would make it harder for banks to obtain credit from their peers and the ECB, reducing their ability to make payments on behalf of their customers or on their own account.

The proportion of failed transactions would fall to 6.3 per cent, or 143 billion euros, if collateral values fell by 30 per cent.

"(But) not even during the past financial crisis were general drops in asset prices of about 30 per cent from one day to the other observed," the economists said.

Banks and ancillary systems such as clearing houses and stock exchanges accounted for 85 per cent of the value of failed transactions across the simulation.

Looking at volumes, bank customers fared the worst, making up 55 per cent of unsettled payments in the most severe scenario.

"Target 2 stress-testing indicates that the system is resilient under the stress scenarios and that liquidity levels seem to be appropriate," the study concluded.

"Even very severe liquidity shocks caused by the most extreme collateral deteriorations lead to relatively mild results."

REUTERS

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