Forward looking behavior in ECB liquidity auctions: Evidence from the pre-crisis period

•Banks behave strategically in ECB operations.•Before LTROs, banks bid at lower rates.•After LTROs, banks bid more aggressively.•There is no evidence for the winner's curse.

Using data from the pre-crisis period we investigate banks' joint bidding behavior in the ECB's Main Refinancing Operations (MRO) and Longer Term Refinancing Operations (LTRO). We test whether banks bid at lower rates in MROs before the LTRO and at higher rates after the LTRO, compared to other operations. We motivate this by findings from the auction literature suggesting that agents' bidding behavior is forward looking and takes sequences of future auctions into account.We offer two findings. First, we find that in general banks bid in the MRO before the LTRO at lower rates as compared to other MROs. Moreover, MRO participants that also bid in the following LTRO bid at even lower rates, compared to peers not bidding in the LTRO. These findings support the hypothesis that banks view obtaining liquidity from the two operations as a substitute. Second, we find that banks generally bid more aggressively in the MRO after the LTRO. Banks that participated also in the LTRO preceding the MRO bid at substantially higher rates. These findings reflect that “short” banks, with potentially large net liquidity needs in the MRO after the LTRO, bid more aggressively. Although size plays a considerable role for bidding behavior, the conclusions are valid for banks of different sizes.