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Bidding in fixed rate tenders: theory and experience with the ECB tenders

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Author Info
Välimäki, Tuomas () (Bank of Finland Research)
Abstract

This paper presents a model of the optimal bidding behaviour of a single bank in the context of fixed rate liquidity tenders. Banks’ bidding is shown to depend crucially on the central bank’s liquidity policy as regards tender allotments. The paper also analyses ECB liquidity policy in terms of the model. The ECB, while applying fixed rate tenders, appears to have been attempting stabilise the market interest rate at a level close to the main refinancing rate. However, this aim was at least partially overridden by that of stabilising total money market liquidity over the course of the reserve maintenance period – even more so when banks were expecting the ECB to raise the main refinancing rate in the near future. The banks’ aggregate bids increased considerably during the period of fixed rate tenders. This was seen to result mainly from profit opportunities associated with a positive spread between market interest rate and main refinancing rate. The positive spread resulted from the combination of expectations of an interest rate hike and liquidity-oriented allotment policy.

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Paper provided by Bank of Finland in its series Research Discussion Papers with number 1/2002.

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Length: 48 pages
Date of creation: 18 Feb 2002
Date of revision:
Handle: RePEc:hhs:bofrdp:2002_001

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Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.bof.fi/en/tutkimus
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Related research
Keywords: bidding; money market tenders; liquidity policy; central bank operating framework;

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Find related papers by JEL classification:
E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Ayuso, Juan & Repullo, Rafael, 2000. "A Model of the Open Market Operations of the European Central Bank," CEPR Discussion Papers 2605, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  2. Ulrich Bindseil & Franz Seitz, 2001. "The supply and demand for Eurosystem deposits - the first 18 months," Working Paper Series 44, European Central Bank. [Downloadable!]
  3. Juan Ayuso & Rafael Repullo, 2000. "A Model of the Open Market Operations of the European Central Bank," Banco de España Working Papers 0016, Banco de España. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Kauko, Karlo, 2002. "Links between securities settlement systems: An oligopoly theoretic approach," Research Discussion Papers 27/2002, Bank of Finland. [Downloadable!]
  2. Granlund , Peik, 2002. "Bank exit legislation in US, EU and Japanese financial centres," Research Discussion Papers 25/2002, Bank of Finland. [Downloadable!]
  3. Peik Granlund, 2004. "Bank exit legislation in US, EU and Japanese financial centres," Finance 0405015, EconWPA. [Downloadable!]
  4. Matti Keloharju & Markku Malkamäki & Kjell G. Nyborg & Kristian Rydqvist, 2004. "A descriptive analysis of the Finnish treasury bond market 1991–1999," Finance 0405017, EconWPA. [Downloadable!]
    Other versions:
  5. Karlo Kauko, 2004. "Links between securities settlement systems: An oligopoly theoretic approach," Industrial Organization 0405003, EconWPA. [Downloadable!]
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