Banks' Behaviour in the European Money Market and the Operational Framework of the Eurosystem

Abstract

The Eurosystem has stated its intention to reformulate important aspects of its operational framework. This paper presents a model to analyze banks' behaviour in the European money market. Its main result is that the suggested alterations are sensible, but that further improvements should be undertaken. Under the current framework under- and overbidding behaviour in the main refinancing operations and wildly differing provisions of required reserves can occur. This can be avoided if first, the maturities of the main refinancing operations do not overlap, and second, if the required reserves are not remunerated at an average rate.