Bank Capital Regulation in a Zero Interest Environment

43 Pages Posted: 22 Feb 2018 Last revised: 12 Jan 2024

See all articles by Robin Döttling

Robin Döttling

Erasmus University Rotterdam (EUR); Rotterdam School of Management, Erasmus University

Multiple version iconThere are 2 versions of this paper

Date Written: July 29, 2024

Abstract

How does the zero lower bound on deposit rates (ZLB) affect how banks respond to capital regulation? I study this question in a model in which households value the liquidity services of deposits yet do not accept negative deposit rates. When deposit rates are constrained by the ZLB, tight capital requirements disproportionately hurt franchise values and are therefore less effective in curbing excessive risk taking. The model delivers a novel rationale for "interest-dependent" capital regulation that is optimally laxer when the ZLB binds and tighter when the ZLB is slack but may bind in the future.

Keywords: Zero lower bound, capital regulation, franchise value, interest rates, reach for yield, monetary policy

JEL Classification: G21, G28, E43, E58

Suggested Citation

Döttling, Robin, Bank Capital Regulation in a Zero Interest Environment (July 29, 2024). Available at SSRN: https://ssrn.com/abstract=3123044 or http://dx.doi.org/10.2139/ssrn.3123044

Robin Döttling (Contact Author)

Erasmus University Rotterdam (EUR) ( email )

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Rotterdam School of Management, Erasmus University ( email )

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