The 2007 subprime market crisis through the lens of european central bank auctions for short-term funds

Nuno Cassola, Ali Hortaçsu, Jakub Kastl

Research output: Contribution to journalArticlepeer-review

44 Scopus citations


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. The funding costs we estimate using bidding data are also predictive of market- and accounting-based measures of bank performance, reinforcing the usefulness of "revealed preference" information contained in bids.

Original languageEnglish (US)
Pages (from-to)1309-1345
Number of pages37
Issue number4
StatePublished - Jul 2013
Externally publishedYes

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics


  • Liquidity crisis
  • Multi-unit auctions
  • Primary market
  • Structural estimation
  • Subprime market


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