In a recent post discussing the Euro-Zone’s TARGET2, I made some reference to the equivalent clearing and settlement system in the USA without any depth because it was beyond the purview of that post. To address that gap, I dedicate the next few lines to this point. It’s not immediately relevant for this website, but it offers an interesting comparison with TARGET2.
What is ISA?
In the USA, the equivalent to TARGET2 is the Interdistrict Settlement Account (ISA) procedures of the Federal Reserve System. This blog post by Koning offers what is likely to be the most complete review of the system and its history. As to its function, it basically does the same thing as TARGET2. As Dwyer 2012 puts it,
In the United States, (…) a person may get cash in Georgia and spend it in Washington State. Similarly, someone may transfer funds from a bank account in Georgia to an account in Washington State. The monetary union in the United States relies on the free movement of currency and transfer of funds across state borders to keep the value of a dollar bill and a dollar deposit in Georgia the same as its value in Washington State. The system functions this way because the United States has had a monetary union since the late 18th century.
What do ISA Balances Look Like?
Speaking of the USA, it is practical to draw on the ISA experience in order to get some perspective on Eurosystem imbalances. In March 2012, Bijlsma and Lukkezen at Bruegel offered us a little snipped of US ISA imbalances. Here’s the updated view with many thanks to the St Louis FRED.
According to the authors, “every year in April the average ISA balance over the past 12 months (April 1st – March 31st) is calculated and netted”. This is done by shifting holdings in the System of Open Market Account (SOMA) . According to a blog post where Koning takes an in-depth look at the history of the ISA, the Fed might have decided not to settle the accounts between 2008 and 2012 in order to prevent (liquidity) problems in Richmond or San Francisco. According to Michiel Bijlsma and Jasper Lukkezen
“Richmond Fed total assets are currently $210bn, while its ISA liabilities are $134bn. In relative size this is comparable to the Target 2 liabilities of some Euro area members.”
Legal Feasibility of Lasting ISA Imbalances
This having become a topic of which European analysts are fond, it is not surprising to find Euro-Intelligence as the source of some clarification for what may have created the duration of these imbalances. Returning to Michiel Bijlsma and Jasper Lukkezen‘s insights, technically/legally, this was possible because
“The Federal Reserve Board is required by law to maintain par between dollars issued by the reserve banks, but not to net out ISA balances. If a Federal Reserve Bank ran out of collateral, it would be unable to settle with the other district banks. As a result, banks in that district would be unable to transact with banks in other districts, which breaks the par between dollars issued.” (emphasis added)
The imbalances seem to be due to the problems encountered by the biggest financial entities registered in these districts, Bank of America and Wells Fargo.
“the Richmond and SF accounts are dominated by Bank of America and Wells Fargo. Bank of America is the largest commercial US bank. Its assets are $2,200bn, which is about the size of total assets of banks registered in Richmond Fed. Wells Fargo is the fourth largest bank in the US with total assets $1,258bn. Total assets of banks registered at the San Francisco Fed are USD2tn.”