Case Study OBAR Bank

Hans Daamen - Rabobank and

Hans Pijl - DNB

Seminar Operational Monetary Policy

11-13 April 2007

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

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?

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)

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

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

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

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)?

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?

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?

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%

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?

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

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?

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)?

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%.

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?

Tuesday 9 May: last day of mp

• Trading starts at 3.77/78% choice

• Opening position OBAR Bank -/- € 5 billion

• ECB 40 at 9.15hCurrent account 141.4 billion Imbalance stays around € 12 billionPre-announcement fine-tuning opertion

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?

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?

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.

Case study OBAR Bank

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