Bank Capital Regulation in a Zero Interest Environment

Robin Döttling

EconStor Preprints from ZBW - Leibniz Information Centre for Economics

Abstract: How do near-zero deposit rates affect (optimal) bank capital regulation and risk taking? I study these questions in a tractable, dynamic equilibrium model, in which forward-looking banks compete imperfectly for deposit funding, subject to a (zero) lower bound constraint on deposit rates (ZLB). At the ZLB, capital requirements become less effective in curbing excessive risk-taking incentives, as they disproportionately hurt franchise values. As a consequence, optimal dynamic capital requirements vary with the level of interest rates if the ZLB binds occasionally. Subsidizing bank funding costs at the ZLB dampens risk-taking, but may reduce overall welfare.

Keywords: Zero lower bound; Search for yield; Capital regulation; Bank competition; Franchise value (search for similar items in EconPapers)
JEL-codes: E43 G21 G28 (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-mac and nep-rmg
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https://www.econstor.eu/bitstream/10419/191028/1/BankCapital_ZLB_2019_JF.pdf (application/pdf)

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:zbw:esprep:191028

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