Operations of Open Market for Transitory Expansion (OMA: Repo)

4.2.1 General

The operations undertaken by the Banco de la República, Central Bank of Colombia and monetary author-ity²⁵, to expand or contract the monetary supply in the economy are known as the OMA. Usually, they undertake the REPO operations for a transitory expansion when they need to increase the monetary supply.

24Data can be consulted at the following article in Spanish or in English (but with fewer data),

http://historico.elpais.com.co/historico/nov012005/ECO/A601N1.html, http://www.bnamericas.com/news/banking/BBVA_

wins_Granahorrar_auction_with_US*424mn_bid.

25For further information see the following website http://www.banrep.gov.co/index_eng.html

The mechanism used for the loan is a multi-unit auction that works like a sealed bid auction (similar to a uniform auction), and it uses an electronic system for placing the bids.

In the …rst place, the Central Bank (when money supply expands) decides the expansion quota and the maturity term of the REPO (there can be short and long terms for maturity), or the term in which the agent has to repurchase the …nancial title that he lends as collateral. Next, the …nancial agents (bidders) place their bids in an electronic system called ENS²⁶, which is regulated by the bank, bidding the amount of money that they would like to borrow and also the e¤ective interest rate that they are willing to pay. All the bidders face uncertainty about the bids that other …nancial agents make.

Meanwhile, the bank receives all the bids and organizes them from the highest to the lowest e¤ective interest rate, where demand equals the supply (quota for expansion) the winners price is set, that is the lowest rate bid by the winners (where demand and supply are in equilibrium).

Also, bidders have to give to the bank some kind of …nancial title as collateral (with the same value of the loan), and when the maturity term ends, the bidders who won have to repurchase the title at a …xed price (taking into account the interest rate).

These operations are undertaken almost daily and the terms vary depending on the transitory expansion that the bank requires, the most common is the one day REPO. The process is exactly the opposite when the bank is contracting the money supply but the …nancial operation is called reverse REPO.

4.2.2 Results

The Central Bank runs this type of auction on a monthly basis. For the purpose of this survey, we are going to analyze only one of these auctions.

On May 3rd 2010, the bank held a one day maturity term REPO auction, where 39 bids were made by all the intermediaries mentioned in the table below. The price that each had to pay was an e¤ective interest rate of 3%. The results were as follows:

Table 5: Open Market Operations for Transitory Expansion

26Further information about this electronic system can be consulted in the following website http://www.banrep.gov.co/payment_system/ps_sen.htm.

O¤ers Presented O¤ers Approved E¤ective Rate (%)

Term (days) Nominal Value (COP$) Min. Max. Nominal Value (COP$) E¤ective Cut Rate (%) 1 2,239,707,000,000.00 3.000 4.000 2,239,707,000,000.00 3.000

Total 2,239,707,000,000.00 2,239,707,000,000.00

Intermediaries Number of Bids Ammount bidded (loan COP$)

Commercial banks 28 2,174,000,000,000.00

Bussiness …nancial companies 2 10,000,000,000.00

Trust companies 3 14,200,000,000.00

Stock brokerage 6 1,172,000,000,000.00

Source and calculations: Banco de la República de Colombia.

As illustrated in the chart above, the total amount auctioned was a nominal value (the monetary sum paid at the maturity of a …nancial instrument) of COP $2,239,707,000,000. The bids or bid points rewarding a rate-quantity pair, show that the minimum rate bid was 3%, the maximum was 4% and the e¤ective cut rate was 3% (loan interest rate for all investors).

In this case nobody was left out and everyone received a part of the expansion quota. This kind of mechanism (uniform auction) clearly shows the advantages that a bidding process could bring to the central bank. For example, it is easy to think how bidders, worried about losing this auction, could try to increase their chances by bidding a higher e¤ective rate even if they lose pro…t.

In this case, all bids were between 3% and 4% and all the expansion quota was lent to the bidders²⁷ .

4.2.3 Conclusions

Uniform auctions can be a very useful tool in monetary policy. Therefore, this type of auctions had the advantage that they could raise loan rates substantially. This happens because, the uncertainty that bidders are facing, ends up changing their behavior towards aggressive bidding (this doesn’t mean that it is more pro…table than other multiunit auctions, it depends, there is no general ranking).

All the bidders face liquidity issues and this dynamic is the central incentive for this type of auction to work, the …nancial cost that they face when they bid for a REPO is the opportunity cost that they face for

27All the results were taken from http://www.banrep.gov.co/informes-economicos/ine_sub_repmay.htm, more auction

re-immediate liquidity, therefore allocating these loans by auction is very pro…table. Is it always the best way to allocate the REPO? The answer is that it depends, as always, on Economics. The uniform auction has the advantage that it promotes participating and avoids entry deterrence and predation (also collusion, see Klemperer, 2003), this means that weaker bidders have a chance to win with a lower interest rate, but on the other hand this could end in lower pro…t (lower rates) for the bank. Also, this auction is ine¢cient in that bidders want to make a pro…t and they would not bid their entire valuations. Although, these revenue problems can a¤ect the central bank basically, because collusion could lead to even lower rates for loans, a¤ecting their interest incomes.