Regulatory Effects on Short-Term Interest Rates

51 Pages Posted: 1 Jun 2019 Last revised: 28 Aug 2020

See all articles by Angelo Ranaldo

Angelo Ranaldo

University of St. Gallen; University of St. Gallen - School of Finance

Patrick Schaffner

University of St. Gallen - School of Finance

Michalis Vasios

European Securities and Markets Authority

Date Written: August 27, 20

Abstract

We analyse 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, disincentivises 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 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 originated from the new regulatory framework.

Keywords: Interest rates, repo, central clearing, financial infrastructure, leverage ratio, EMIR, regulatory effects, safe assets, collateral

JEL Classification: G28

Suggested Citation

Ranaldo, Angelo and Schaffner, Patrick and Vasios, Michalis, Regulatory Effects on Short-Term Interest Rates (August 27, 20). Bank of England Working Paper No. 801 (2019) Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=3397082 or http://dx.doi.org/10.2139/ssrn.3397082

Angelo Ranaldo

University of St. Gallen ( email )

Swiss Institute of Banking and Finance s/bf-HSG
Unterer Graben 21
St. Gallen, 9000
Switzerland
+41712247010 (Phone)

HOME PAGE: http://www.sbf.unisg.ch/Lehrstuehle/Lehrstuhl_Ranaldo/Homepage_Ranaldo.aspx

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

Patrick Schaffner (Contact Author)

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

Michalis Vasios

European Securities and Markets Authority ( email )

103 Rue de Grenelle
Paris, 75007
France

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