Working Paper: NBER ID: w15158
Authors: Nuno Cassola; Ali Hortacsu; Jakub Kastl
Abstract: In this paper we study European banks' demand for short-term funds (liquidity) during the summer 2007 subprime market crisis. We use bidding data from the European Central Bank's auctions for one-week loans, their main channel of monetary policy implementation. Through a model of bidding, we show that banks' behavior reflects their cost of obtaining short-term funds elsewhere (i.e., in the interbank market) as well as a strategic response to other bidders. We find considerable heterogeneity across banks in their willingness to pay for short-term funds supplied in these auctions. Accounting for the strategic component is important: while a naive interpretation of the raw bidding data may suggest that virtually all banks suffered a dramatic increase in the cost of obtaining funds in the interbank market, we find that for about one third of the banks, the change in bidding behavior was simply a strategic response. Using a complementary data set, we also find that banks' pre-turmoil liquidity costs, as estimated by our model, are predictive of their post-turmoil liquidity costs, and that there is considerable heterogeneity in these costs with respect to the country-of-origin. Finally, among the publicly traded banks, the willingness to pay for short-term funds in the second half of 2007 are predictive of stock prices in late 2008.
Keywords: Subprime Crisis; Liquidity; Repo Auctions; Bidding Behavior
JEL Codes: D44; D53; E5; G01
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| pre-turmoil liquidity costs (G19) | post-turmoil liquidity costs (G33) |
| willingness to pay for ECB loans in the latter half of 2007 (E49) | stock prices in late 2008 (G10) |
| banks' willingness to pay (G21) | reported interbank rates (F33) |
| banks' bidding behavior in ECB auctions (E58) | banks' costs of obtaining short-term funds in the interbank market (G21) |
| banks' bidding behavior in ECB auctions (E58) | strategic responses to other bidders (D44) |