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What just happened? A tech glitch in the European Central Bank’s payment system caused widespread disruptions that delayed salaries and welfare funds for thousands earlier this month. The crisis, which could have escalated into chaos had it persisted into the next day when millions of public-sector workers, pensioners, and welfare recipients were due to receive their payments, illustrates the pivotal role technology plays in maintaining the stability of financial systems.
“If it had lasted until Friday, there would have been big risk-management questions for banks,” Alistair Milne, a professor of financial economics at Britain’s Loughborough Business School, told Reuters, which provided a timeline of events in an exclusive report. “Bank risk managers would have to decide: Are we willing to credit the customer account on the trust that the money will eventually turn up?”
The breakdown occurred when the ECB’s system for settling financial trades, Target 2 Securities (T2S), crashed shortly after 8 a.m. Frankfurt time on Thursday. The Target 2 (T2) network, which handles large payments between central banks and commercial lenders, followed two hours later.
Initially, the issue was mistakenly attributed to database errors, leading to a lengthy process of manually parsing transactions while the system was offline. This manual intervention was necessary because the initial diagnosis made a transfer to a backup system, or “failover,” impossible without replicating the same issue.
It wasn’t until the afternoon that the ECB identified the true cause: a defective hardware component at one of the system’s four secret locations. This revelation allowed technicians to shift transactions to a backup system, resuming settlement by 6 p.m. that evening. Despite this, work continued through the night to clear the backlog of transactions.
Markus Ferber, a member of the European Parliament, was amazed at the seeming lack of robust backup systems. “A hardware failure is excusable, but not having a backup that can kick in instantaneously in case of problems is not,” he said. An ECB official noted that the affected hardware did have multiple backups, but the bank is investigating why they didn’t activate as expected.
These backup procedures allow Target 2 participants to send payments through alternative means, such as the Information and Control Module (ICM). However, the ECB has not disclosed the specific details of the backup systems that failed to activate during the recent incident.
The ECB had recently overhauled its payment system and crisis management protocols following a series of outages in 2020, as recommended by Deloitte, which found weaknesses in business continuity management, communication protocols during crises, and disaster recovery processes.
One key initiative was establishing a more comprehensive second line of defense for all Target Services. This involved strengthening the backup systems and ensuring that they could activate effectively in case of primary system failures. Now, this recent incident raises questions about the system’s resilience and the potential for future disruptions.
The fallout from the outage included delayed payments for thousands in Greece and Austria, as well as frustrated brokers dealing with delayed trades. Some clients faced interest charges for funds they never received, prompting plans to seek compensation from the ECB. However, legal experts like Paul Harris of Osborne Clarke suggest that obtaining compensation from a central bank may be more challenging than from a private firm.
Aaron Klein, a senior fellow at the Brookings Institution, noted that designing a payment system that never fails might be impractical or excessively costly. “And, if it is, it may be more costly than tolerating a few hours of delay,” he said. The ECB has initiated a thorough analysis of the incident, acknowledging its “adverse consequences” for market participants and their clients.
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