ZLB reduces effectiveness of bank capital ratios – ECB paper

Euro sign, Frankfurt

The zero lower bound can reduce the macro-prudential effectiveness of imposing capital ratios on banks, a working paper published by the European Central Bank finds.

In Bank capital regulation in a zero interest environment, Robin Döttling presents a dynamic model of the banking sector. In his model, banks engage in imperfect competition for deposits, while households do not accept negative deposit rates.

Deposit rates become constrained when interest rates approach the zero lower bound. When

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