Variable Rate Liquidity Tenders

Abstract

This paper constructs an equilibrium model for the short-term money market, when the central bank provides liquidity via variable rate tenders. The relation between market rate of interest and liquidity is derived from a single bank's profit maximisation problem in the interbank market, and the CB determines its liquidity provision by minimising a quadratic loss function that contains both deviations of expected market rate from CB target rate and differences between liquidity supply and target liquidity. We model equilibrium bid behaviour in the tenders and explain the underbidding phenomenon resulting from the minimum bid rate. We also show that, when maturities of consecutive operations overlap, the expected market interest rate will rise above the CB's target whenever a target rate change (hike or cut) is expected to occur in the same reserve maintenance period. Finally, we review the data from the ECB variable rate tenders and find that the ECB has been fairly liquidity oriented in its allotment decisions.

Funding liquidity risk: Definition and measurement

“…If interbank markets are frictionless and banks are risk neutral, Välimäki (2002) and Ayuso and Repullo (2003) show that it is optimal for banks to only bid at the minimum bid rate. No bank is, therefore, willing to pay a premium above the minimum bid rate.…”

Banks' Participation in the Eurosystem Auctions and Money Market Integration

“…The initial choice of the fixed-rate tender, aimed at conveying a strong signal on the stance of monetary policy, involved some distortions in bidding behaviour at times of interest rate change expectations; see for example Repullo (2001, 2003), Catalao (2001),Nautz and Oechssler (2003). Some distortions may appear also under the variable rate auction with minimum bid rate, if rate cut expectations prevail in the market Välimäki (2002). andEwerhart (2002) provide theoretical analyses of the auction under these circumstances.12 On 5 August 2004 the ECB announced the plan to replace the current two-tier collateral system, which allows some asset classes to be eligible in selected countries only, with a single collateral list throughout the euro area.…”

Mercado interbancario colombiano y manejo de liquidez del Banco de la República

“…Una característica común de los documentos sobre tasa interbancaria es la inclusión de choques aleatorios que modifican de forma sorpresiva las necesidades de liquidez de los bancos (v.g. Moschitz, 2004;Välimäki, 2004;Pérez y Rodríguez, 2006). La inclusión de 42 Una descripción de cómo se implementa la política monetaria en la zona euro puede encontrarse en ECB (2011).…”

“…De acuerdo con el Capítulo XIX de la Circular Básica Contable de la SFC, un repo cerrado es aquel en el cual se acuerda inmovilizar los valores objeto de la operación, razón por la cual el compromiso de transferencia de la propiedad, se deberá realizar sobre los mismos valores inmovilizados, salvo que se haya establecido expresamente la sustitución de tales valores. De acuerdo con esta regulación, las operaciones de reporto o repo se presumirán cerradas salvo pacto expreso en contrario 5. Aunque la reglamentación contempla repos abiertos y cerrados, en Colombia sólo se celebran repos cerrados, por lo tanto este documento hace alusión únicamente a este tipo de operaciones repo.…”