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Bank capital regulation in a zero interest environment

Robin Döttling ()

No 2422, Working Paper Series from European Central Bank

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, though their overall welfare effects are ambiguous. JEL Classification: G21, G28, E44, E58

Keywords: capital regulation; franchise value; search for yield; unconventional monetary policy; zero lower bound (search for similar items in EconPapers)
Date: 2020-06
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-mac and nep-mon
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Related works:
Working Paper: Bank Capital Regulation in a Zero Interest Environment (2019) Downloads
Working Paper: Bank Capital Regulation in a Zero Interest Environment (2019) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20202422

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