Regulatory effects on short-term interest rates

Angelo Ranaldo, Patrick Schaffner and Michalis Vasios

Journal of Financial Economics, 2021, vol. 141, issue 2, 750-770

Abstract: We analyze the effects of prudential regulation on short-term interest rates. The European Market Infrastructure Regulation (EMIR) induces clearing houses (CCPs) to supply large amounts of cash in reverse repurchase agreements (repos). Basel III, in contrast, disincentivizes the borrowing demand by tightening banks’ balance sheet constraints. Using unique regulatory data of CCP investment activity and repo transactions, we find compelling evidence for both the supply and demand channels. The overall effects are decreasing short-term rates and increasing market imbalances in various forms, all of which entail unintended consequences due to the new regulatory framework.

Keywords: Repo; Clearing house; EMIR; Basel III; Leverage ratio (search for similar items in EconPapers)
JEL-codes: G23 G28 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (12)

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Working Paper: Regulatory effects on short-term interest rates (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:141:y:2021:i:2:p:750-770

DOI: 10.1016/j.jfineco.2021.04.016

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