A heterogeneous agent model for assessing the effects of capital regulation on the interbank money market under a corridor system

Christopher Jackson and Joseph Noss ()
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Joseph Noss: Bank of England, Postal: Publications Group Bank of England Threadneedle Street London EC2R 8AH

No 548, Bank of England working papers from Bank of England

Abstract: Money markets play an important role in the implementation of monetary policy. Their structure and dynamics have, however, changed significantly in recent years. In particular, a number of new banking regulations will affect the behaviour of money market participants, and so have the potential to affect money market interest rates. This paper offers a model to examine how prudential regulation might affect interbank overnight interest rates where the central bank implements monetary policy using a corridor system. Combined with a set of assumptions as to the cost banks might incur in meeting regulatory capital requirements, it offers a framework with which to explore how such prudential regulation might affect the dynamics of overnight interest rates. The results — which are illustrative — estimate the interest rates at which banks might borrow and lend reserves overnight in the presence of prudential regulation. They suggest that risk-weighted capital requirements might increase the average level of overnight interbank interest rates, while the regulatory minimum leverage ratio might decrease it. If applied to real-world data on central bank reserves balances and regulatory metrics, this model also offers an insight into how central bank policymakers could — if they so choose — amend their operational frameworks to account for the effects of regulation.

Keywords: Monetary policy implementation; money markets; bank regulation; central bank operations. (search for similar items in EconPapers)
JEL-codes: E43 E58 G12 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2015-09-11
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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