Bank Capital Regulation in a Zero Interest Environment

Robin Döttling

No 9dxzf, OSF Preprints from Center for Open Science

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.

Date: 2023-12-19
New Economics Papers: this item is included in nep-ban, nep-cba, nep-fdg and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:osf:osfxxx:9dxzf

DOI: 10.31219/osf.io/9dxzf

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