fixed effects banks IMF - BANKS PARTICIPATION IN THE...

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BANKS’ PARTICIPATION IN THE EUROSYSTEM AUCTIONS AND MONEY MARKET INTEGRATION by Antonio Scalia (*) , Giuseppe Bruno (**) and Maurizio Ordine (*) paper presented at the ECB Workshop on Monetary Policy Implementation Frankfurt am Main, 20-21 January 2005 Abstract 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 mar- ket rate. We document several country effects, related to differences in the structure of the do- mestic 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. JEL classification: D44, E43, E50, G21. Keywords: Bidding behaviour, open market operations, auctions, money market, reserve man- agement (*) Banca d’Italia, Monetary and Exchange Rate Policy Department and (**) Economic Re- search Department. The views expressed in this paper are those of the authors and do not in- volve the responsibility of the Bank.
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1 1. Introduction 1 Every week several hundreds of banks in the euro area participate in the Eurosystem repo auction, the so-called main refinancing operation (MRO), which injects reserve money in the banking system. With average weekly allotments that currently exceed 200 billion euro and sev- eral hundreds of bidders, MROs are the largest auctions ever held in the world. They take place in a decentralised fashion, whereby the collection of bids and the provision of funds are carried out at local level by the National Central Banks (NCBs), whereas the ECB compiles the aggre- gate bid schedule and decides on the allotment. Through the interbank market the successful bidders channel the allotted funds to 7,000 credit institutions in the area, for their day-to-day li- quidity management and the fulfilment of the reserve requirement. Although not the exclusive vehicle of refinancing for the Eurosystem 2 , the MROs are the primary instrument for the im- plementation of the single monetary policy. After an initial period in which the MROs were
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fixed effects banks IMF - BANKS PARTICIPATION IN THE...

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