Business Intelligence

The 2007 Subprime Market Crisis Through The Lens Of European Central Bank Auctions For Short-Term Funds

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Executive Summary

In this paper the author study European banks' demand for short-term funds (liquidity) during the summer 2007 subprime market crisis. They 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, they 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. They find considerable heterogeneity across banks in their willingness to pay for short-term funds supplied in these auctions.

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