Work

Bank Capital Regulation in a Zero Interest Environment

Year: 2024

Type: article

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.

Source: Journal of the European Economic Association

DOI: 10.1093/jeea/jvae048

Author: Robin Döttling

Institution: Erasmus University Rotterdam

Language: English

Topic: Banking stability, regulation, efficiency

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: hybrid

Estimated APC paid: $4,751

Funder: European Central Bank