Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/177706 
Title: 

Bank Capital Regulation in a Zero Interest Environment

The document was removed on behalf of the author(s)/ the editor(s).

Year of Publication: 
2018
Series/Report no.: 
Tinbergen Institute Discussion Paper No. TI 2018-016/IV
Publisher: 
Tinbergen Institute, Amsterdam and Rotterdam
Abstract: 
How do near-zero interest rates affect bank competition, risk taking and regulation? I study these questions in a tractable dynamic general equilibrium model, in which forward-looking banks compete imperfectly for deposit funding, and deposit insurance may induce excessive risk taking. The zero lower bound on deposit rates (ZLB) distorts bank competition and boosts risk shifting incentives, particularly if rates are expected to remain near-zero for long. At the ZLB, capital regulation becomes a less effective tool to curb risk shifting incentives. When banks cannot pass on the cost of capital to depositors, tight capital requirements erode franchise value, countervailing the usual "skin in the game" effect. Optimal capital requirements vary with the interest rate cycle, highlighting a novel interaction between monetary and macro-prudential policies. Complementing existing regulation with policy tools that subsidize the funding cost of banks may improve welfare at the ZLB.
Subjects: 
Zero lower bound
search for yield
capital regulation
bank competition
risk shifting
franchise value
JEL: 
G21
G28
E43
Document Type: 
Working Paper

Files in This Item:
The document was removed on behalf of the author(s)/ the editor(s) on: January 16, 2019


Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.