Bank Capital Regulation in a Zero Interest Environment

56 Pages Posted: 22 Feb 2018 Last revised: 27 Feb 2020

See all articles by Robin Döttling

Robin Döttling

Rotterdam School of Management, Erasmus University

Date Written: February 26, 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 (February 26, 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 )

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

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
149
Abstract Views
737
rank
210,638
PlumX Metrics