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

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.

Citation

Rubio, M., & Yao, F. (2020). Bank capital, financial stability and Basel regulation in a low interest-rate environment. International Review of Economics and Finance, 67, 378-392. https://doi.org/10.1016/j.iref.2020.02.008

• Journal Article Type: Article
• Acceptance Date: Feb 14, 2020
• Online Publication Date: Feb 25, 2020
• Publication Date: May 1, 2020
• Deposit Date: Apr 30, 2020
• Publicly Available Date: Feb 26, 2021
• Journal: International Review of Economics & Finance
• Print ISSN: 1059-0560
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 67
• Pages: 378-392
• DOI: https://doi.org/10.1016/j.iref.2020.02.008
• Keywords: Economics and Econometrics; Finance
• Public URL: https://nottingham-repository.worktribe.com/output/3961297
• Publisher URL: https://www.sciencedirect.com/science/article/pii/S1059056020300459