The 2007 Subprime Market Crisis Through the Lens of European Central Bank Auctions for Short-Term Funds

Nuna Cassola, Ali Hortacsu and Jakub Kastl
Additional contact information
Nuna Cassola: European Central Bank
Ali Hortacsu: Department of Economics, University of Chicago

No 08-039, Discussion Papers from Stanford Institute for Economic Policy Research

Abstract: In this paper we study European banks’ demand for short-term funds during the 2007 subprime market crisis. We use bidding data from the European Central Bank’s auctions for one-week loans. Through a model of bidding, we show that bank behavior reflects the cost of obtaining short-term funds elsewhere as well as a strategic response to other bidders. We find considerable heterogeneity across banks in their willingness to pay for short-term funds supplied in these auctions. Accounting for the strategic component is important: while a naive interpretation of the raw bidding data may suggest that virtually all banks suffered a dramatic increase in the cost of obtaining funds in the interbank market, we find that for about one third of the banks, the change in bidding behavior was simply a strategic response. Using a complementary dataset, we also find that bank pre-turmoil liquidity costs, as estimated by our model, are predictive of their post-turmoil liquidity costs, and that there is considerable heterogeneity in these costs with respect to the country-of-origin. Finally, among the publicly traded banks, the willingness to pay for short-term funds in the second half of 2007 are predictive of stock prices in late 2008.

Keywords: multiunit auctions; primary market; structural estimation; subprime market; liquidity crisis (search for similar items in EconPapers)
JEL-codes: D44 E58 G01 (search for similar items in EconPapers)
Date: 2009-07
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Journal Article: The 2007 Subprime Market Crisis Through the Lens of European Central Bank Auctions for Short‐Term Funds (2013)
Working Paper: The 2007 subprime market crisis through the lens of European Central Bank auctions for short-term funds (2011)
Working Paper: The 2007 Subprime Market Crisis Through the Lens of European Central Bank Auctions for Short-Term Funds (2009)
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