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Regulatory effects on short-term interest rates

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  • Ranaldo, Angelo
  • Schaffner, Patrick
  • Vasios, Michalis

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.

Suggested Citation

  • Ranaldo, Angelo & Schaffner, Patrick & Vasios, Michalis, 2021. "Regulatory effects on short-term interest rates," Journal of Financial Economics, Elsevier, vol. 141(2), pages 750-770.
  • Handle: RePEc:eee:jfinec:v:141:y:2021:i:2:p:750-770
    DOI: 10.1016/j.jfineco.2021.04.016
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    Cited by:

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    2. Angelo Ranaldo & Benedikt Ballensiefen & Hannah Winterberg, 2020. "Monetary policy disconnect," Working Papers on Finance 2003, University of St. Gallen, School of Finance.
    3. Robert Oleschak, 2019. "Central Counterparty Auctions and Loss Allocation," Working Papers 2019-06, Swiss National Bank.
    4. Benos, Evangelos & Huang, Wenqian & Menkveld, Albert & Vasios, Michalis, 2019. "The cost of clearing fragmentation," Bank of England working papers 800, Bank of England, revised 22 Nov 2019.

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    More about this item

    Keywords

    Repo; Clearing house; EMIR; Basel III; Leverage ratio;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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