Regulatory Effects on Short Term Interest Rates
Journal
Journal of Financial Economics
ISSN
0304-405X
Type
journal article
Date Issued
2021-04-21
Author(s)
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.
Language
English
Keywords
Repo
clearing house
EMIR
Basel III
leverage ratio
HSG Classification
contribution to scientific community
HSG Profile Area
SOF - System-wide Risk in the Financial System
Refereed
Yes
Publisher
Elsevier
Volume
141
Number
2
Start page
750
End page
770
Subject(s)
Eprints ID
260921