The ACPR Regulation and Systemic Risk Chair analyzes the effects of prudential regulations on short-term interest rates. The European Market Infrastructure Regulation (EMIR) provides an incentive for clearing houses (CCPs) to provide large amounts of liquidity in reverse repurchase agreements (repo). Basel III, by contrast, discourages borrowing demand by tightening bank balance sheet constraints. Using unique regulatory data on CCP investment activity and repo transactions, we find compelling evidence on both supply and demand channels. The overall effects are a fall in short-term rates and an increase in market imbalances in various forms, all of which have unintended consequences arising from the new regulatory framework.
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