Have lower interest rates tightened capital regulation? Empirical analysis using data of regional banks

Akira Sakai ()
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Akira Sakai: Nakasone Peace Institute

Economics Bulletin, 2023, vol. 43, issue 1, 74 - 84

Abstract: The purpose of this article is to explore the relationship between bank capital regulation and interest rates. We develop a model that assumes a regional monopoly in bank lending under Basel III-like capital regulation. Our model assumes that banks have the means to relax capital regulation. However, we show that in a very low interest rate environment, the effectiveness of some mitigation measures is weakened. Therefore, our banking model predicts that very low interest rates will reduce the ability of banks to control capital adequacy ratios. The findings from our empirical analysis are consistent with this prediction. Our analysis also suggests that yields on zero-risk weighted assets, such as sovereign bonds and reserve deposits, affect the health of banks. In a very low interest rate environment, our findings suggest that more flex- ible capital regulation by the monetary authority is increasingly important in light of macroprudential policies. The policy implication of this paper is that it presents a new macroprudential policy that promotes regional eco- nomic growth by making the capital regulations of Japan's regional banks more flexible. regulation and interest rates. We develop a model that assumes a regional monopoly in bank lending under Basel III-like capital regulation. Our model assumes that banks have the means to relax capital regulation. However, we show that in a very low interest rate environment, the effectiveness of some mitigation measures is weakened. Therefore, our banking model predicts that very low interest rates will reduce the ability of banks to control capital adequacy ratios. The findings from our empirical analysis are consistent with this prediction. Our analysis also suggests that yields on zero-risk weighted assets, such as sovereign bonds and reserve deposits, affect the health of banks. In a very low interest rate environment, our findings suggest that more flex- ible capital regulation by the monetary authority is increasingly important in light of macroprudential policies. The policy implication of this paper is that it presents a new macroprudential policy that promotes regional eco- nomic growth by making the capital regulations of Japan's regional banks more flexible.

Keywords: Capital regulation; Low interest rates; Counter cyclical buffer (search for similar items in EconPapers)
JEL-codes: E4 G2 (search for similar items in EconPapers)
Date: 2023-03-30
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