Evaluating the Impact of Shocks to the Supply of Overnight Unsecured Money Market Funds on the Target2-Banca D’Italia Functioning : A Simulation Study

This paper presents a simulation exercise assessing the ability of Italian banks to fulfil their payment commitments in TARGET2, the Euro area Real Time Gross Settlement System, in the event of a contraction in the supply of funds in the overnight unsecured money market. The results of the exercise, which was carried out with reference to two reserve maintenance periods: 12 November to 9 December 2008, during the acute phase of the crisis, and 11 November to 7 December 2009, show that even a drastic reduction in trading on the interbank market would have caused only limited effects on the system's functioning. These broadly positive results depend basically on two factors. First, both simulations refer to periods in which the ratio of unsecured overnight loans to the total number of settled payments was significantly lower than in the pre-crisis period; and in both periods the average level of liquidity in participants' settlement accounts was relatively high due to banks' reliance on Eurosystem credit facilities