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Case Study OBAR Bank

Case Study OBAR Bank. Hans Daamen - Rabobank and Hans Pijl - DNB Seminar Operational Monetary Policy 11-13 April 2007. Content OBAR Bank-case.

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Case Study OBAR Bank

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  1. Case Study OBAR Bank Hans Daamen - Rabobank and Hans Pijl - DNB Seminar Operational Monetary Policy 11-13 April 2007

  2. Content OBAR Bank-case • assessment and regularly re-assessment OBAR´s liquidity management strategy (including bids in MRO-tender and desired reserve requirements pattern) • effect of frontloading ECB in MRO´s • calendar effects (in particularly end-of-month and special weekends) • unexpected Target payment system incident • explaining spill-over effects EONIA-related positions on O/N euro area market • spread EONIA rate (as unofficial operational target Eurosystem) and minimum bidrate MRO • official interest rate decision by the Governing Council • fine-tuning operation on last day of the maintenance period

  3. Start reserve maintenance period (MP) on 12 April • Background information money market conditions • MRO allotment BA plus € 1 billion • How does Hans assess the frontloading policy of the ECB? • What is Hans´s strategy for OBAR´s reserve requirements pattern for this MP´s?

  4. First week MP • liquidity conditions gradually tightened despite the loose allotment in the first MRO • reason autonomous factor forecast errors due to calendar effect (i.e. Good Friday and the Easter weekend)

  5. Thursday 20 April • Opening position -/- € 5 billion • Preferred end-of-day position + € 5 billion + € 3,6 billion • Overnights opens 3.83/84% • 9.15h ECB 40 figures

  6. Thursday 20 April Release of ECB of ECB 40 On 19 April 2007: Average reserve requirements : 142.6 Average holdings : 143.9 Current account holdings : 151.5 Marginal lending facility : 0.2 Deposit facility : 0.1

  7. Thursday 20 April After the ECB 40 figures • Figures are as expected • Some market participants disappointed • Overnight rate trades up a basispoint to 3.80/3.81% • Daily activities to fund the liquidity deficit and manage interest rate risk of OBAR Bank

  8. Monday 24 April • Start of the new week • What does Hans think about the current market situation, and to what extent does Hans re-assess it´s strategy for the day, week and the current MP (reserve requirements pattern)?

  9. Daily activities of OBAR dealers Among others: • Bidding to large customers • Conversations with brokers • Conversations with other banks • Dollar / euro swaps Could Hans elaborate more on the techniques of the euro/dollar swap trade?

  10. Monday 24 April ECB tender announcement • 15.30h variable rate with a benchmark allotment of € 275 billion • Drain of € 16 billion should be no problem for the market • What is Hans´s strategy for OBAR´s reserve requirements pattern for the coming MP?

  11. Monday 24 April, end of the day • Technical TARGET problems in Germany • Stop sending for Germany • No payments from and to Germany possible • 20.00h Late closing of TARGET • OBAR Bank is short € 1 billion (€ 4 billion instead of € 5 billion) • EONIA fixed at 3.90%

  12. Tuesday 25 April, opening • Opening position again -/- € 5 billion • Overnights trades at 3.87/89% • Rumors of large use of deposit facility • Italian banks complain about tighter liquidity • 1-week EONIA offered at 3.83% • Waiting for ECB 40 • What does Hans think about the current market situation and what should Hans ideally do in the coming MRO tender?

  13. ECB 40 on Tuesday 25 April Average reserve requirements : 142.6 Average holdings : 143.5 Current account holdings : 134.5 Marginal lending facility : 2.5 Deposit facility : 15.5

  14. Friday 28 April, after ECB 40 • Overnight trades 3.87/89% • Light trading • OBAR dealers are not lending overnight deposits • Could Hans give additional and more structural reasons for the current high and persistent spread between the EONIA rate and the minimum bid rate of the MRO?

  15. Thursday 4 May • Governing Council official interest rates hike decision by 25 bp to 4.00%. • Could Hans give an indication what the effect of Eurosystem´s official interest rates hike on the current O/N rate is? How does this effect in the current operational framework (as from March 2004) compare to the old operational framework (before March 2004)?

  16. Friday 5 May • this morning trading started around 3.83/84% • liquidity desk manages to acquire around € 12 billion and ends with a positive balance at DNB of € 5 billion. The EONIA is fixed at 3.85%.

  17. Monday Morning 8 May • After ECB40 - the market estimates an accumulated reserve surplus of € 40 billion. • Two more trading days in reserve period • Liquidity situation should be okay, but with tendency on the tight side. • Waiting for ECB 40 • Expected balance for Friday € 142.0 billion • Expected liquidity surplus end mp € 24.7 billion • Overnight trades at 3.94% • What should happen if the ECB does not announce that in case of continued imbalance due to autonomous factor forecast errors, ECB stands ready to conduct fine-tuning operation on last day of the reserve maintenance period?

  18. Tuesday 9 May: last day of mp • Trading starts at 3.77/78% choice • Opening position OBAR Bank -/- € 5 billion • ECB 40 at 9.15h • Current account 141.4 billion • Imbalance stays around € 12 billion • Pre-announcement fine-tuning opertion

  19. Announcement fine tuning operation10.00h CET • Fixed term deposits at fixed rate of 3.75% • Maturity 1 day • Maximum amount € 12 billion • Bidding closes at 10.30h CET • What do you think Hans will do? What does Hans do?

  20. Announcement tender result • Allotment € 10 billion (100%) • Market not fully satisfied, but it can only blaim itself. • What reasons could be mentioned for the lower than targeted allotment? • Accumulated surplus now estimated at around € 29 billion. • Could Hans elaborate on the market mechanism on a last day of the maintenance period?

  21. Tuesday 9 May, end of the day • End of the day some banks are looking for money and bid 3.75% • EONIA fixed at 2.95% • OBAR Bank fullfilled reserves and made a nice profit at the end of this maintenance period.

  22. Case study OBAR Bank We hope you liked it We enjoyed doing it Questions?

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