Bank Capital Regulation in a Zero Interest Environment

Robin Dottling

doi:10.1093/jeea/jvae048

Bank Capital Regulation in a Zero Interest Environment

Robin Dottling

Department of Finance

Research output: Contribution to journal › Article › Academic › peer-review

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.

Original language	English
Journal	Journal of the European Economic Association
DOIs	https://doi.org/10.1093/jeea/jvae048
Publication status	Published - 10 Oct 2024

Research programs

RSM F&A
ESE - ECO
ESE - F&A

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10.1093/jeea/jvae048Licence: CC BY

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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.",

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Bank Capital Regulation in a Zero Interest Environment

Abstract

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