Bank Capital Regulation in a Zero Interest Environment

61 Pages Posted: 17 Jun 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: June, 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: capital regulation, franchise value, search for yield, unconventional monetary policy, zero lower bound

JEL Classification: G21, G28, E44, E58

Suggested Citation

Döttling, Robin, Bank Capital Regulation in a Zero Interest Environment (June, 2020). ECB Working Paper No. 20202422, Available at SSRN: https://ssrn.com/abstract=3628322

Robin Döttling (Contact Author)

Rotterdam School of Management, Erasmus University ( email )

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Room T08-46
3000 DR Rotterdam, 3000 DR
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Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

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