Bank Capital Regulation in a Zero Interest Environment

54 Pages Posted: 22 Feb 2018 Last revised: 24 Nov 2021

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: November 23, 2021

Abstract

How does the zero lower bound on deposit rates (ZLB) affect how banks react to capital regulation? I study this question in a dynamic 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 (November 23, 2021). 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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Room T08-46
3000 DR Rotterdam, 3000 DR
Netherlands

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

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