Regulatory effects on short-term interest rates

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 cash in reverse repurchase agreements (repos). Basel III, contrast, disincentivizes borrowing demand by tightening banks’ balance sheet constraints. Using unique regulatory data CCP investment activity and repo transactions, we find compelling evidence for both channels. overall are decreasing rates increasing market imbalances various forms, all which entail unintended consequences due new framework.