Regulatory Effects on Short-Term Interest Rates
39 Pages Posted: 1 Jun 2019
Date Written: May 31, 2019
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: Suggested Citation