14  A paired bid consists of a single nominal amount and two spreads at which the counterparty is willing to borrow against the delivery of narrow and wider collateral respectively. This provides participants with two opportunities to raise a specific quantity of funds whilst avoiding any risk of over allotment that might otherwise occur if two single bids for the same nominal amount were submitted. If both parts of a paired bid are above their respective clearing spreads, and therefore eligible to be accepted, the participant will be allotted against the bid which offers them better value (the bid with the highest spread relative to the clearing spread for that collateral type). 15  As opposed to the old LTRs which were run on a discriminatory price basis. BIS central bankers’ speeches  7  The mechanics of the allocation mechanism are relatively complicated. In a normal auction there will be one price at which the auction will clear. But in the ILTRs there are two clearing prices, one for each of the two types of collateral. And there will be pairs of clearing rates which ensure that the total amount lent in the operation equals the amount on offer.
1)  Considered theoretically as risk-free securities, government bonds are usually considered as floor rates and constitute the benchmark for pricing almost all other securities. Thus, rising sovereign yields mechanically shift funding costs upwards for all private agents. Interest rates on government bonds usually include small premia to compensate for liquidity and credit risk. For a proper monetary policy transmission, these risk premia should not reach such level and volatility that the signal from the key policy rates is no longer perceivable and no longer reaches the real economy. In recent months, the tensions rapidly spread to other markets to a point that jeopardized the transmission of monetary policy, as European government bond markets became largely dysfunctional. 2)  The second contagion mechanism goes through the banking system. On the liability side, banks are already suffering from increasing government debt issuance which has a crowding out effect and contribute to steepen the yield curve; it is a real issue as banks debts maturing in the next three years are significant while government support and central banks facilities are expected to be gradually removed. In that tense context, the sovereign debt crisis trigger increasing funding tensions for European banks owing to the contagion of sovereign to banks spreads. It reflects the traditional belief that domestic financial institutions cannot be less risky than the sovereign which are supposed to back them in case of need.