TY - JOUR AU - Cassola,Nuno AU - Hortacsu,Ali AU - Kastl,Jakub TI - The 2007 Subprime Market Crisis Through the Lens of European Central Bank Auctions for Short-Term Funds JF - National Bureau of Economic Research Working Paper Series VL - No. 15158 PY - 2009 Y2 - July 2009 UR - http://www.nber.org/papers/w15158 L1 - http://www.nber.org/papers/w15158.pdf N1 - Author contact info: Nuno Cassola European Central Bank E-Mail: nuno.cassola@ecb.int Ali Hortacsu Department of Economics University of Chicago 1126 East 59th Street Chicago, IL 60637 Tel: 773/702-5841 E-Mail: hortacsu@uchicago.edu Jakub Kastl Department of Economics Stanford University 579 Serra Mall Stanford, CA 94305-6072 Tel: 650/725-3995 Fax: 650/725-5702 E-Mail: jkastl@stanford.edu AB - In this paper 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. Through a model of bidding, we 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. We find considerable heterogeneity across banks in their willingness to pay for short-term funds supplied in these auctions. Accounting for the strategic component is important: while a naive interpretation of the raw bidding data may suggest that virtually all banks suffered a dramatic increase in the cost of obtaining funds in the interbank market, we find that for about one third of the banks, the change in bidding behavior was simply a strategic response. Using a complementary data set, we also find that banks’ pre-turmoil liquidity costs, as estimated by our model, are predictive of their post-turmoil liquidity costs, and that there is considerable heterogeneity in these costs with respect to the country-of-origin. Finally, among the publicly traded banks, the willingness to pay for short-term funds in the second half of 2007 are predictive of stock prices in late 2008. ER -