Regulatory effects on short-term interest rates

Staff working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 31 May 2019

Staff Working Paper No. 801

By Angelo Ranaldo, Patrick Schaffner and Michalis Vasios 

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.

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