The Reversal Interest Rate: A Critical Review

Rafael Repullo

No 15367, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper reviews the analysis in Brunnermeier and Koby (2018), showing that lower monetary policy rates can only lead to lower bank lending if there is a binding capital constraint and the bank is a net investor in debt securities, a condition typically satisfied by high deposit banks. It next notes that BK's capital constraint features the future value of the bank's capital, not the current value as in standard regulation. Then, it sets up an alternative model with a standard capital requirement in which profitability matters because bank capital is endogenously provided by shareholders, showing that in this model there is no reversal rate.

Keywords: Monetary policy; Reversal rate; Negative interest rates; Bank profitability; Bank market power; Capital requirements (search for similar items in EconPapers)
JEL-codes: E52 G21 L13 (search for similar items in EconPapers)
Date: 2020-10
New Economics Papers: this item is included in nep-ban, nep-cwa, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (24)

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Working Paper: The Reversal Interest Rate. A Critical Review (2020)
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