MRO Bidding in the Presence of LTROs : An Empirical Analysis of the Pre-crisis Period

Using individual data from the Eurosystem's liquidity providing tenders for the pre-crisis period we investigate banks' joint bidding behaviour in Main Refinancing Operation (MRO) and Longer Term Refinancing Operations (LTRO). We test whether banks bid at lower rates in MROs before the LTRO and at higher rates after the LTRO, compared to other operations. We offer two main findings. First, we find that in general banks bid in the MRO before the LTRO at lower rates as compared to “other” MROs. Moreover, MRO participants which also bid in the following LTRO bid at even lower rates, compared to peers not bidding in the LTRO. These findings support the hypothesis that banks view obtaining liquidity from the two operations as substitutes and bid strategically. Second, we find that banks generally bid more aggressively in the MRO after the LTRO. Even more striking, banks which participated also in the LTRO preceding the MRO bid at substantially higher rates. These findings reflect that “short” banks, with potentially large net liquidity needs after the LTRO bid more aggressively. Other counterparties with liquidity needs in that particular operation are forced, as a best response reaction, to bid also at higher rates. Although size plays a considerable role for bidding behaviour, the conclusions are valid for banks of different size