Regulatory effects on short-term interest rates

Angelo Ranaldo; Patrick Schaffner; Michalis Vasios

doi:10.1016/j.jfineco.2021.04.016

Journal of Financial Economics Vol. 141 No. 2 2021

Regulatory effects on short-term interest rates

Angelo Ranaldo¹; Patrick Schaffner^2,1; Michalis Vasios³

¹ University of St.Gallen · ² Bank of England · ³ Norges Bank Investment Management, Queensberry House, 3 Old Burlington Street, London W1S 3AE, United Kingdom

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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.

DOI: 10.1016/j.jfineco.2021.04.016
Volume: 141
Issue: 2
Pages: 750-770
Language: en
Sources: bibtex:phds-export.bib openalex crossref

Regulatory effects on short-term interest rates

Abstract

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