Regulatory Effects on Short-Term Interest Rates

39 Pages Posted: 1 Jun 2019

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

Norges Bank Investment Management (NBIM)

Date Written: May 31, 2019

Abstract

We analyse the effects of EMIR and Basel III regulations on short-term interest rates. EMIR requires central clearing houses (CCP) to continually acquire safe assets, thus expanding the lending supply of repurchase agreements (repo). Basel III, in contrast, disincentivises the borrowing demand by tightening banks’ balance sheet constraints. Using unique datasets of repo transactions and CCP activity, 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: repo, central clearing, financial infrastructure, leverage ratio, EMIR, regulatory effects

JEL Classification: G28

Suggested Citation

Ranaldo, Angelo and Schaffner, Patrick and Vasios, Michalis, Regulatory Effects on Short-Term Interest Rates (May 31, 2019). Bank of England Working Paper No. 801 (2019). 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

Norges Bank Investment Management (NBIM) ( email )

Queensberry House
3 Old Burlington Street
London, W1S 3AE
United Kingdom

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