No. 562 - Banks’ participation in the Eurosystem auctions and money market integration

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by Giuseppe Bruno, Maurizio Ordine and Antonio Scalia September 2005

This study performs a panel analysis of banks’ participation and bidding in the Eurosystem weekly repo auctions during July 2000-August 2001, employing a data set of individual bids that includes the bidder code, size, nationality and membership in a banking group. We adopt the econometric approach of Wooldridge (1995) to obtain consistent estimates in the presence of endogenous sample selection. We find that an increase in interest rate volatility lowers the probability of bidding, but induces bidders to shade bid rates less relative to the interbank market rate. We document several country effects, related to differences in the structure of the domestic money market and the opportunity cost of collateral. Large bidders participate more regularly and shade their bids less. Group bidders demand larger amounts in the auction, thus showing an attitude to act as liquidity brokers towards the rest of the banking system. Large bidders and group bidders manage their collateral more efficiently, as revealed by their superior ability to “ride the yield curve” and submit multiple bids. Our findings support the transnational bank hypothesis, according to which banks with a multinational profile use their informational advantage to arbitrage out the differences in interest rates across countries, thus fostering money market integration.

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