Bidding and Performance in Repo Auctions: Evidence from ECB Open Market Operations

Abstract

1 We wish to thank the ECB's Front Office Division for providing secondary market data and Jean-Louis Schirmann for helpful discussions on the microstructure of the euro area money JEL Classification Numbers: G21, G12, D44, E43, E50.

The Eurosystem Money Market Auctions: A Banking Perspective

“…However, in Germany, particularly small savings banks are usually provided with liquidity from their respective head institutes (the socalled Landesbanks). Moreover, because of the government guarantees for savings 1 As Nyborg, Bindseil, and Strebulaev (2002) show in their study, the interest rate in the interbank market is on average higher than the marginal rate at which liquidity is allotted in the money market auctions. They interpret that as a sign of underpricing following the winner's curse problem.…”

“…Our data consists of the bids submitted by all German banks that participated in the thirty-nine liquidity auctions conducted by the European Central Bank from June 4 compare the intuition with results in Nyborg, Bindseil, and Strebulaev (2002) with respect of uncertainty and reduced underpricing at the end of a maintenance periode 28, 200128, , to March 21, 2002, and measures that describe various characteristics of all individual banks, both bidders and non-bidders. We matched the proprietary data of all bids submitted to ECB to balance sheet data collected by the Bundesbank.…”

“…Initial study of this issue provided somewhat perplexing answers. Studies (such as Nyborg, Bindseil, and Strebulaev (2002)) with crude size data on banks indicated that larger banks participated more in the liquidity auctions, suggesting, perhaps, that information about the auction might be concentrated more in these banks, giving them an advantage. This contrasts with the design policy of the auctions, which was intended to provide an equal footing to all participating banks, large and small.…”

“…Even the size of the bank is captured by a crudely defined dummy variable, which divides the sample of banks into two groups based on the type of charter the bank has (which is only broadly correlated with size). Nyborg, Bindseil, and Strebulaev (2002) study bidding behavior of all banks participating during the first year of the ECB's variable-interest-ratetender auctions (starting in June 2000) from an auction-theory perspective. They are particularly interested in the question of whether bigger banks have a competitive advantage in the money auctions.…”

“…They may use more sophisticated bidding strategies, as pointed out in Nyborg, Bindseil, and Strebulaev (2002), which may explain why they nevertheless manage to pay less for the liquidity won.…”