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Regulatory effects on short-term interest rates

Author

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  • Ranaldo, Angelo

    (University of St. Gallen)

  • Schaffner, Patrick

    (Bank of England)

  • Vasios, Michalis

    (Norges Bank Investment Management)

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.

Suggested Citation

  • Ranaldo, Angelo & Schaffner, Patrick & Vasios, Michalis, 2019. "Regulatory effects on short-term interest rates," Bank of England working papers 801, Bank of England.
    • Handle: RePEc:boe:boeewp:0801
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    Cited by:

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    2. Krohn, Ingomar & Sushko, Vladyslav, 2022. "FX spot and swap market liquidity spillovers," Journal of International Money and Finance, Elsevier, vol. 120(C).
    3. Angelo Ranaldo & Benedikt Ballensiefen & Hannah Winterberg, 2020. "Monetary policy disconnect," Working Papers on Finance 2003, University of St. Gallen, School of Finance.
    4. Robert Oleschak, 2019. "Central Counterparty Auctions and Loss Allocation," Working Papers 2019-06, Swiss National Bank.
    5. Gerba, Eddie & Katsoulis, Petros, 2021. "The repo market under Basel III," Bank of England working papers 954, Bank of England.
    6. Bassi, Claudio & Behn, Markus & Grill, Michael & Waibel, Martin, 2023. "Window dressing of regulatory metrics: evidence from repo markets," Working Paper Series 2771, European Central Bank.
    7. 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.
    8. Hüser, Anne-Caroline & Lepore, Caterina & Veraart, Luitgard, 2021. "How does the repo market behave under stress? Evidence from the Covid-19 crisis," Bank of England working papers 910, Bank of England, revised 18 Jun 2021.

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    More about this item

    Keywords

    Repo; central clearing; financial infrastructure; leverage ratio; EMIR; regulatory effects;
    All these keywords.

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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