Bank Capital Regulation in a Zero Interest Environment

Robin Döttling

No 18-016/IV, Tinbergen Institute Discussion Papers from Tinbergen Institute

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, but their overall welfare effects are ambiguous.

Keywords: Zero lower bound; search for yield; capital regulation; bank competition; risk shifting; franchise value (search for similar items in EconPapers)
JEL-codes: E43 G21 G28 (search for similar items in EconPapers)
Date: 2018-02-28, Revised 2019-10-11
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge and nep-mac
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Related works:
Working Paper: Bank capital regulation in a zero interest environment (2020)
Working Paper: Bank Capital Regulation in a Zero Interest Environment (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20180016

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