An evaluation of the Bank of England’s ILTR operations: comparing the product-mix auction to alternatives

We compare the product-mix auction (PMA) – the mechanism used by the Bank of England (BoE) for its Indexed Long-Term Repo (ILTR) operations – to simpler alternative auction designs, namely a pair of separate simultaneous auctions, and a ‘reference price auction’. Using data from the auctions held in June 2010 to January 2014, we find that the PMA increased welfare (defined by the difference between the spreads that financial institutions were willing to pay and the spreads that the BoE was willing to accept) by approximately 50%, or 2 basis points per loan, relative to these alternatives. We would expect larger welfare gains in a less stable period than the period studied, and simulations confirm this. Broader benefits of the auctions of reducing systemic risk, while mitigating moral hazard, informing the BoE about stress in the market, and communicating the ‘correct’ price to the market, are taken into account in our approach, to the extent that the BoE’s supply curve internalises some of these externalities. We also find that the PMA always gave the BoE more (or occasionally the same) surplus and revenue relative to if one of the alternative designs had been used. However, the effect of the PMA on aggregate bidder surplus was ambiguous. The latter result may be a property of the period studied, and of the fact that there were only two sets of eligible collateral in this period.