Bank Capital Regulation in a Zero Interest Environment

59 Pages Posted: 22 Feb 2018 Last revised: 14 Jan 2019

See all articles by Robin Döttling

Robin Döttling

Rotterdam School of Management, Erasmus University

Date Written: January 12, 2019

Abstract

How do near-zero deposit rates affect (optimal) bank capital regulation and risk taking? I study these questions in a tractable, dynamic equilibrium model, in which forward-looking banks compete imperfectly for deposit funding, subject to a (zero) lower bound constraint on deposit rates (ZLB). At the ZLB, capital requirements become less effective in curbing excessive risk-taking incentives, as they disproportionately hurt franchise values. As a consequence, optimal dynamic capital requirements vary with the level of interest rates if the ZLB binds occasionally. Subsidizing bank funding costs at the ZLB dampens risk-taking, but may reduce overall welfare.

Keywords: Zero lower bound, search for yield, capital regulation, bank competition, risk shifting, franchise value

JEL Classification: G21, G28, E43

Suggested Citation

Döttling, Robin, Bank Capital Regulation in a Zero Interest Environment (January 12, 2019). Available at SSRN: https://ssrn.com/abstract=3123044 or http://dx.doi.org/10.2139/ssrn.3123044

Robin Döttling (Contact Author)

Rotterdam School of Management, Erasmus University ( email )

P.O. Box 1738
Room T08-46
3000 DR Rotterdam, 3000 DR
Netherlands

Register to save articles to
your library

Register

Paper statistics

Downloads
72
rank
308,382
Abstract Views
319
PlumX Metrics