Banks' Participation in the Eurosystem Auctions and Money Market Integration

Abstract

We perform a panel analysis of bidding in the Eurosystem auctions, using individual data that include the bidder code, size, nationality and membership in a banking group. We find that an increase in interest rate volatility lowers the probability of bidding, but induces bidders to shade rates less. Large bidders participate more regularly, while group bidders demand larger amounts, showing an aptitude to act as liquidity brokers. Our findings support the transnational bank hypothesis of Freixas-Holthausen (2005): banks with a multinational profile use their informational advantage to arbitrage out the differences in interest rates across countries, thus fostering money market integration.

Keywords: Bidding behavior, repo auctions, open market operations, money market, reserve management

JEL Classification: D44, E43, E50, G21