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

Author

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  • Akira Sakai

    (Nakasone Peace Institute)

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.

Suggested Citation

  • Akira Sakai, 2023. "Have lower interest rates tightened capital regulation? Empirical analysis using data of regional banks," Economics Bulletin, AccessEcon, vol. 43(1), pages 74-84.
  • Handle: RePEc:ebl:ecbull:eb-21-00702
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    References listed on IDEAS

    as
    1. Del Negro, Marco & Giannone, Domenico & Giannoni, Marc P. & Tambalotti, Andrea, 2019. "Global trends in interest rates," Journal of International Economics, Elsevier, vol. 118(C), pages 248-262.
    2. Holston, Kathryn & Laubach, Thomas & Williams, John C., 2017. "Measuring the natural rate of interest: International trends and determinants," Journal of International Economics, Elsevier, vol. 108(S1), pages 59-75.
    3. Rubio, Margarita & Yao, Fang, 2020. "Bank capital, financial stability and Basel regulation in a low interest-rate environment," International Review of Economics & Finance, Elsevier, vol. 67(C), pages 378-392.
    4. Kopecky, Kenneth J. & VanHoose, David, 2004. "A model of the monetary sector with and without binding capital requirements," Journal of Banking & Finance, Elsevier, vol. 28(3), pages 633-646, March.
    5. Borio, Claudio & Gambacorta, Leonardo, 2017. "Monetary policy and bank lending in a low interest rate environment: Diminishing effectiveness?," Journal of Macroeconomics, Elsevier, vol. 54(PB), pages 217-231.
    6. VanHoose, David, 2007. "Theories of bank behavior under capital regulation," Journal of Banking & Finance, Elsevier, vol. 31(12), pages 3680-3697, December.
    7. Kenneth E. Train, 1991. "Optimal Regulation: The Economic Theory of Natural Monopoly," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200848, April.
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    More about this item

    Keywords

    Capital regulation; Low interest rates; Counter cyclical buffer;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • G2 - Financial Economics - - Financial Institutions and Services

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