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Bank capital, financial stability and Basel regulation in a low interest-rate environment

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  • Rubio, Margarita
  • Yao, Fang

Abstract

The current low interest-rate environment poses new challenges to international bank regulation policies. This paper analyzes the role of the Basel regulation in this new context. We study this issue by using a DSGE model with housing and collateral constraints, both on borrowers and banks. Results show that, on the one hand, low interest rates lead to an increase in bank capital, calling for less strict international regulatory regimes. On the other hand, this environment encourages more indebtedness of borrowers, calling for a stricter regulation for macroprudential purposes. An optimal analysis of the countercyclical buffer in Basel III regulation reveals that risks to financial stability outweigh the extra accumulation of bank capital. Thus, the countercyclical buffer should be implemented more aggressively in a low interest-rate world.

Suggested Citation

  • 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.
    • Handle: RePEc:eee:reveco:v:67:y:2020:i:c:p:378-392
    DOI: 10.1016/j.iref.2020.02.008
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    Cited by:

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    2. Huang, Chao & Moreira, Fernando & Archibald, Thomas & Yu, Kaidong & Zhang, Xuan, 2023. "The impact of a systemic tax on bank capital holdings, optimal capital requirements and social welfare," International Review of Economics & Finance, Elsevier, vol. 87(C), pages 124-142.
    3. Francesco Busato & Maria Ferrara & Monica Varlese, 2023. "Disinflation costs and macroprudential policies: real and welfare effects," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 51(6), pages 1216-1230, December.
    4. 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.
    5. Lyu, Juyi & Le, Vo Phuong Mai & Meenagh, David & Minford, Patrick, 2021. "Macroprudential regulation in the post-crisis era: Has the pendulum swung too far?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 74(C).

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    More about this item

    Keywords

    Basel regulation; International financial markets; Macroprudential policy; Collateral constraint; Financial stability;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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