The 2007 Subprime Market Crisis Through the Lens of European Central Bank Auctions for Short-Term Funds

65 Pages Posted: 25 Aug 2011

See all articles by Nuno Cassola

Nuno Cassola

University of Milan Bicocca - CefES; University of Lisbon - CEMAPRE

Ali Hortacsu

University of Chicago - Department of Economics; National Bureau of Economic Research (NBER)

Jakub Kastl

Princeton University - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: August 19, 2011

Abstract

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. Our analysis provides a high-frequency, disaggregated perspective on the 2007 crisis, which was previously studied through comparisons of collateralized and uncollateralized interbank money market rates which do not capture the heterogeneous impact of the crisis on individual banks. Through a model of bidding, we show that banks’ bids reflect their cost of obtaining short-term funds elsewhere (e.g., in the interbank market) as well as a strategic response to other bidders. The strategic response is empirically important: while a naïve interpretation of the raw bidding data may suggest that virtually all banks suffered an increase in the cost of short-term funding, we find that for about one third of the banks, the change in bidding behavior was simply a strategic response. We also find considerable heterogeneity in the short-term funding costs among banks: for over one third of the bidders, funding costs increased by more than 20 basis points, and funding costs vary widely with respect to the country-of-origin. Estimated funding costs of banks are also predictive of market - and accounting-based measures of bank performance, suggesting the external validity of our findings.

Keywords: Multiunit auctions, primary market, structural estimation, subprime market, liquidity crisis

JEL Classification: D44, E58, G01

Suggested Citation

Cassola, Nuno and Hortacsu, Ali and Kastl, Jakub, The 2007 Subprime Market Crisis Through the Lens of European Central Bank Auctions for Short-Term Funds (August 19, 2011). ECB Working Paper No. 1374, Available at SSRN: https://ssrn.com/abstract=1912460

Nuno Cassola (Contact Author)

University of Milan Bicocca - CefES ( email )

Milan
Italy

University of Lisbon - CEMAPRE ( email )

Lisbon
Portugal

Ali Hortacsu

University of Chicago - Department of Economics ( email )

1126 East 59th Street
Chicago, IL 60637
United States
773-702-5841 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jakub Kastl

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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