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Bank Capital Regulation in a Zero Interest Environment

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  • Döttling, Robin

Abstract

How do near-zero deposit rates affect (optimal) bank capital regulation and risk taking? I study these questions in a tractable, dynamic equilibrium model, in which forward-looking banks compete imperfectly for deposit funding, subject to a (zero) lower bound constraint on deposit rates (ZLB). At the ZLB, capital requirements become less effective in curbing excessive risk-taking incentives, as they disproportionately hurt franchise values. As a consequence, optimal dynamic capital requirements vary with the level of interest rates if the ZLB binds occasionally. Subsidizing bank funding costs at the ZLB dampens risk-taking, but may reduce overall welfare.

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  • Döttling, Robin, 2019. "Bank Capital Regulation in a Zero Interest Environment," EconStor Preprints 191028, ZBW - Leibniz Information Centre for Economics.
    • Handle: RePEc:zbw:esprep:191028
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    More about this item

    Keywords

    Zero lower bound; Search for yield; Capital regulation; Bank competition; Franchise value;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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