 Private value of central bank liquidity and Banks’ bidding behavior in variable rate tender auctionsFalko Fecht and Patrick Weber Journal of Banking & Finance, 2022, vol. 136, issue C Abstract: We use a unique data set that comprises each Euro area bank’s daily recourse to the ECB’s marginal lending facility (MLF) and all its bids placed in the ECB’s main refinancing operations (MROs) that were conducted as variable rate tenders until October 2008. We show that the more aggressive a bank bids in a MRO, the higher is its propensity to subsequently draw on the MLF. Our results indicate that particularly with the beginning of the financial crisis, the interest rate paid by a bank in a variable rate tender auction strongly reflects its private value for liquidity, i.e. its opportunity costs of obtaining short-term funding in money markets, and thus, the risk premium it is charged in the private market. This suggests 1) that variable rate tender auctions preserve some market discipline and contain moral hazard issues, especially in times when a central bank is extending its liquidity provision and 2) that the average interest rate paid in an auction can be a useful indicator for bank supervisors to gauge a bank’s access to liquidity in money markets. Keywords: Banks access to interbank liquidity; LOLR Facility; Liquidity auctions (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:136:y:2022:i:c:s0378426621001801 DOI: 10.1016/j.jbankfin.2021.106221 Access Statistics for this article Journal of Banking & Finance is currently edited by Ike Mathur More articles in Journal of Banking & Finance from Elsevier |
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