The liquidity of financial system plays a central role in systemic crises. In this paper, we show that the ECB haircut policies provided an important liquidity support to distressed financial institutions during the euro area sovereign debt turmoil. Using novel, micro data on the pool of collateral eligible to ECB open market operations, we construct a “public” liquidity mismatch indicator (LMI) for the French aggregate banking sector based on the ECB haircuts. We then compare it to the “private” LMI based on the haircuts in private repo markets in the spirit of Bai et al. (2018). The difference between the two indicators represents a new measure of the ECB liquidity support. Our results suggest that the ECB haircut policies indeed helped French banks to reduce the liquidity mismatch. Moreover, higher ECB liquidity support is associated with higher cash and sovereign asset holdings by the French banks as well as with their lower probability of default.

The fixed rate tender is one of the main procedures used by central banks in the implementation of their monetary policies. While academic research has largely dismissed the procedure owing to its tendency to encourage overbidding, central banks such as the ECB and the Bank of England have continued using it. We investigate this apparent conflict by considering an auction-theoretic setting with private information about declining marginal valuations. Since overbidding entails exposure risk, an equilibrium may exist even if bids are costless and the intended volume is pre-announced. In fact, the allotment quota may be strictly below one with certainty. Also with adaptive expectations, overbidding need not escalate. However, the resulting allocation is typically inefficient. Empirical proxies of exposure risk are significant in both euro and sterling operations. Our findings have implications, in particular, for the potential reintroduction of pro rata allotment in the main refinancing operations of the Eurosystem.