Bank Capital Regulation in a Zero Interest Environment

56 Pages Posted: 22 Feb 2018 Last revised: 13 Aug 2020

See all articles by Robin Döttling

Robin Döttling

Rotterdam School of Management, Erasmus University; Erasmus Research Institute of Management (ERIM)

Multiple version iconThere are 2 versions of this paper

Date Written: April 22, 2020

Abstract

How do near-zero interest rates affect optimal bank capital regulation and risk-taking? I study this question in a dynamic model, in which forward-looking banks compete imperfectly for deposit funding, but households do not accept negative deposit rates. When deposit rates are constrained by the zero lower bound (ZLB), tight capital requirements disproportionately hurt franchise values and become less effective in curbing excessive risk-taking. As a result, optimal dynamic capital requirements vary with the level of interest rates if the ZLB binds occasionally. Higher inflation and unconventional monetary policy can alleviate the problem, though their overall welfare effects are ambiguous.

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

JEL Classification: G21, G28, E43, E58

Suggested Citation

Döttling, Robin, Bank Capital Regulation in a Zero Interest Environment (April 22, 2020). 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 )

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Erasmus Research Institute of Management (ERIM) ( email )

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3000 DR Rotterdam
Netherlands

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