The Repo Auctions of the European Central Bank and the Vanishing Quota Puzzle*

Abstract

Until June 2000 the European Central Bank (ECB) used fixed rate tenders for its weekly repo auctions. A switch to variable rate tenders became necessary due to massive overbidding by banks. In this paper we introduce a stylized game among banks to investigate this overbidding phenomenon. Our results confirm the weakness of the fixed rate tender format and indicate that the ECB's liquidity management has significantly improved since the switch to the variable rate system. Yet recent episodes of rate cut expectations suggest that the ECB's practice of setting a minimum bid rate should be abandoned in favor of a more symmetric interest rate target.

Bidding behavior in the longer term refinancing operations of the European Central Bank: Evidence from a panel sample selection model

“…11 DCBR MRO is set to zero when a bank did not participate in one of the two previous MROs. Note that the level CBR MRO is severely distorted by banks' massive overbidding during the fixed rate tender period, see Nautz and Oechssler (2003). For that reason, we defined DCBR MRO to be zero in the first LTRO after the ECB's switch to the variable rate tender format in June 2000.…”

The microstructure of the euro money market

“…The "smallest" bid amount was received on the 11 th of January, the first refinancing operation after the century date change (also indicated with a date in Figure 3). 10 See Bindseil and Mercier (1999) for a general discussion of the bidding behaviour in Eurosystem fixed rate auctions and Nautz and Oechsler (1999), Ayuso and Repullo (2000), Breitung and Nautz (2000) and Ehrhart (2000) for critical analyses of the over- …”

Overbidding in fixed rate tenders: The role of exposure risk

“…The range of overbidding factors over which this type of convergence is obtainable clearly depends on the relative importance of expected excess demand and exposure risk, as discussed before. Nevertheless, Theorem 2 can be seen as an "optimistic" counterpart to Nautz and Oechssler's (2003) divergence prediction. …”