رفتار مناقصه در عملیات بهره بلند مدت بانک مرکزی اروپا : شواهدی از یک مدل انتخاب نمونه پانل

This paper analyzes individual bidding data of the longer term refinancing operations (LTROs) of the European Central Bank. We investigate how banks’ bidding behavior is related to a series of exogenous variables including collateral costs, interest rate expectations, market volatility and to individual bank characteristics like country of origin, size, and experience. A specific feature of these auctions is that the number and composition of bidders varies over time. Therefore, we estimate panel sample selection models to control for a bank’s endogenous participation decision. We find that bidding strategies depend on the banks’ attributes. Yet, different bidding behavior generally does not translate into differences concerning bidder success. There is evidence for the winner’s curse effect in LTROs indicating a common value component in banks’ demand for longer term refinancing.

Repo auctions are the predominant instrument for the implementation of monetary policy of the European Central Bank (ECB).1 Repo rates govern short-term interest rates and the availability of repo credit determines the liquidity of the European banking sector. The ECB conducts repo auctions as weekly main refinancing operations (MRO) and as longer term refinancing operations (LTRO) maturing after 3 months. Although MROs are the ECB’s primary policy instrument, LTROs are far from negligible. Currently, refinancing via LTROs amounts to around 120 billion Euro which is more than 25% of overall liquidity provided by the ECB. This paper provides a first analysis of the empirical performance of LTROs. We investigate how money market conditions and bidder characteristics affect banks’ bidding behavior and the auction outcome. Our analysis is based on a unique data set of 50 LTRO auctions conducted between March 1999 and May 2003. Bidder codes allow us to follow bidding behavior of individual banks over time and to apply panel econometric techniques. In contrast to Treasury bill auctions where bids are placed by a small group of primary dealers (see e.g. Nyborg et al., 2002), the number of bidders in LTROs is large and varies considerably in terms of number and composition of bidders. Apparently, banks’ participation in LTROs is determined endogenously. Since a bank’s bid amount or its average bid rate can only be observed if the bank actually participated in the LTRO, estimation is subject to a selection bias, see Heckman (1979). Therefore, accounting for banks’ participation decision is of crucial importance for the empirical analysis of the LTRO bidding data. This paper introduces the random effects sample selection model into the empirical auction literature which extents the cross-sectional Heckman (1979) approach to the panel case, following e.g. Verbeek and Nijman (1992a) or Nijman and Verbeek (1992).2 According to the ECB the LTRO auction format should be simple enough so that longer term refinancing is equally accessible to all banks. In the same vein, LTROs should give a good opportunity to smaller banks which have limited access to the interbank market to receive liquidity for a longer period. We will, therefore, estimate the impact of size, bidding experience and country of origin on banks bidding strategies. In particular, advancing on recent studies on the bidding behavior in central bank repo auctions (see e.g. Bindseil et al., 2004, Bruno et al., 2005 and Linzert et al., 2006), we also shed some light on the determinants of bidding success. In line with the empirical literature on financial auctions, we characterize money market conditions by prevailing interest rate expectations and interest rate uncertainty. Since longer term repos are collateralized central bank credits, we also consider the cost of collateral on the interbank market as opportunity costs for LTRO refinancing. With respect to the role of small banks in LTROs assigned by the ECB, we are particularly interested in how size affects a bidder’s response to changes in collateral costs, interest rate expectations, and interest rate uncertainty. Many financial auctions are natural examples of common value auctions where the value of the auctioned good is uncertain. Therefore, bidding in common value auctions must rely on estimates of the unknown value. This explains the winners curse effect: Naive bidders who win the auction typically realize that they had been overly optimistic. Of course, rational bidders account for this effect. In particular, optimal bidding in common value auctions entails to bid more cautiously when the uncertainty about the goods value rises. This implication has been widely used to confirm the empirical relevance of the winners curse effect in Treasury bill auctions, see e.g. Gordy, 1999, Bjonnes, 2001 and Nyborg et al., 2002. However, Bindseil et al., 2004 and Bruno et al., 2005 found only weak evidence in favor of the winner’s curse effect in the ECB’s MROs. It appears that the demand for reserves in MROs is more closely related to the known liquidity needs of individual banks and thus influenced less by uncertain market conditions. Therefore, empirical evidence on the winner’s curse effect in LTROs could reveal information about the role of LTROs in the monetary framework of the ECB and the use of longer term refinancing. Our main results can be summarized as follows. First, we confirm that selection bias is an issue in our auction data and employ a panel sample selection model accordingly. Second, we find that bidding behavior is influenced by a bank’s size and its country of origin. However, differences in bidders’ response to various exogenous variables do not necessarily imply that banks bid with different success. Typically, banks with lower refinancing costs must realize lower cover to bid ratios and vice versa. Thus, different bidding strategies in LTROs seem to reflect different attitudes towards the risk of going out empty handed. Even bidder experience is not an important issue with respect to a bank’s success. Third, in contrast to the findings from MROs, there is evidence for the winner’s curse effect in LTROs. In line with the theory of common value auctions, banks’ participation, the bid volume and the bid rate decrease when interest rate uncertainty rises. And finally, banks’ bidding in MROs and LTROs must not be seen as independent. In fact, there are significant spill over effects from MROs to LTROs, i.e. banks use LTROs to adjust the liquidity position from MROs. The rest of the paper will proceed as follows. The next section describes the role of LTROs in the operational framework of the ECB and the institutional background. Some descriptive statistics on bidder behavior and performance are given in Section 3. Section 4 introduces the variables that enter our panel regressions and discusses how those might affect bidding behavior. The empirical results on banks’ participation decision and their bidding behavior in terms of bid volume, bid rate and bid rate dispersion are given in Section 5. Section 6 presents our results concerning banks’ bidding success and Section 7 offers some policy conclusions.

During the first five years of the Eurosystem up to 120 billion Euro, i.e. more than 25% of banks’ total refinancing was provided by the ECB through longer term refinancing operations (LTROs). This paper analyzed individual bidding data of LTRO auctions shedding light on banks’ bidding behavior as well as their bidding success. Banks’ bidding can only be observed if a bank actually participates in an auction. In contrast to Treasury bill auctions, in LTROs participation frequency differs considerably across individual banks. A distinguishing feature of our contribution is that the empirical analysis of banks bidding behavior is based on a random effects panel sample selection models that accounts for the endogeneity of banks participation decision and avoids any selectivity bias. One of the original intentions of the ECB when establishing LTROs was to give smaller banks with only limited access to the interbank market a comfortable source of longer term refinancing. However, our results do not substantiate the notion that LTROs are especially designed for and used by smaller banks. In particular, the results from a panel probit model reveal that a bank’s participation probability in a LTRO increases with its size. According to the ECB, an important requirement for its refinancing operations is that the auction procedure does not violate the principle of equal treatment. In particular, certain types of banks should not bid a priori more successfully in LTROs than others. Although we find significant differences in the bidding behavior across banks of different size and from different countries, the resulting differences in terms of bidding success were astonishingly small. The analysis of banks’ cover to bid ratio and their refinancing cost showed that different bidding strategies in most cases do not imply an obvious ranking of banks in terms of bidding success. For example, small banks realize higher cover to bid ratios in LTROs than medium and large banks but also tend to have higher refinancing cost. Moreover, we found that experienced bidders are not significantly more successful in LTROs than less experienced ones. Apparently, the LTRO auctions are sufficiently simple and transparent. The analysis of banks’ bidding behavior provided strong evidence for the winner’s curse effect in LTROs. In line with theoretical predictions, banks reduce their participation, bid at lower interest rates and reduce their bid volume as interest rate uncertainty increases. Interestingly, large banks react stronger to rate uncertainty than small banks. This indicates that large banks are particularly interested in the common value component of the longer term refinancing since they have on average a more active interbank money market desk. The finding of a winner’s curse effect in LTROs is in marked contrast to the evidence from the ECB’s main refinancing operations, see e.g. Bindseil et al., 2004 and Bruno et al., 2005. This suggests that the private value component of central bank refinancing is more pronounced in MROs than in LTROs where common money market conditions seem to be more important for banks’ bidding behavior.