BoE published a working paper that analyzes the effects of the European Market Infrastructure Regulation (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, disincentivizes the borrowing demand by tightening balance-sheet constraints of banks. Using unique datasets of repo transactions and CCP activity, compelling evidence has been found for both supply and demand channels.
The analysis presented in the paper has been conducted based on two unique and granular datasets. The first dataset includes all Euro and Sterling repos traded in the three main interbank platforms (BrokerTec, Eurex Repo, and MTS Repo) and this dataset covers more than 70% of the total European repo market. The second dataset contains the reverse repo and bond investments of clearing houses, with reporting obligations to BoE from November 2013 to December 2017. Three main results emerge from the study:
- First, to conform to new regulation, clearing houses’ lending exerts a pervasive and systematic downward pressure on short-term rates. CCPs’ reverse repos to purchase EMIR-eligible assets significantly decrease short-term interest rates, thus supporting the supply hypothesis.
- Second, this effect increases during quarterly reporting dates, that is, when the Basel III leverage ratio imposes balance sheet constraints on banks demanding (but not lending) repos. This evidence suggests that the joint regulatory effects of EMIR and Basel III further decrease short-term rates, thus supporting the demand hypotheses.
- Third, it is found that regulatory-driven supply has significant adverse effects on price dispersion and lending volume. Supply induced by regulation increases the net supply of repos in the interbank market, the cross-sectional dispersion of short-term rates with strongest effects on the safest assets, and the time-varying forward discount. 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.
Keywords: Europe, UK, Banking, Securities, Basel III, EMIR, CCP, Short-Term Interest Rates, Repo, Leverage Ratio, Research, BoE
The European Banking Authority (EBA) published four draft principles to support supervisory efforts in assessing the representativeness of COVID-19-impacted data for banks using the internal ratings based (IRB) credit risk models.
The Bank for International Settlements (BIS) Innovation Hub updated its work program, announcing a set of projects across various centers.
Certain members of the U.S. Senate Committee on Banking, Housing, and Urban Affairs issued a letter to the Securities and Exchange Commission (SEC)
The European Insurance and Occupational Pensions Authority (EIOPA) published a consultation paper on the advice on the review of the securitization prudential framework in Solvency II.
The Prudential Regulation Authority (PRA) issued a statement on PRA buffer adjustment while the Bank of England (BoE) published a notice on the statistical reporting requirements for banks.
The Federal Financial Supervisory Authority of Germany (BaFin) proposed to amend the “Capital Investment Conduct And Organization Ordinance” and issued a draft circular on the minimum resolvability requirements for resolution planning.
The European Banking Authority (EBA) proposed guidelines, for the resolution authorities, on the publication of the write-down and conversion and bail-in exchange mechanic, with the comment period ending on September 07, 2022.
The Financial Services Authority of Indonesia (OJK) is strengthening cooperation with the Australian Prudential Regulation Authority (APRA) and the Japanese Financial Services Agency (JFSA)
The European Parliament and the Council published Regulation 2022/868 on European data governance (Data Governance Act).
The European Banking Authority (EBA) published phase 2 of its reporting framework 3.2. The technical package supports the implementation of the updated reporting framework by providing standard specifications