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| Akira Sakai |
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| ''Have lower interest rates tightened capital regulation? Empirical analysis using data of regional banks
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| ( 2023, Vol. 43 No.1 ) |
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| The purpose of this article is to explore the relationship between bank capital
regulation and interest rates. We develop a model that assumes a regional
monopoly in bank lending under Basel III-like capital regulation. Our model
assumes that banks have the means to relax capital regulation. However, we
show that in a very low interest rate environment, the effectiveness of some
mitigation measures is weakened. Therefore, our banking model predicts that
very low interest rates will reduce the ability of banks to control capital adequacy ratios. The findings from our empirical analysis are consistent with this prediction. Our analysis also suggests that yields on zero-risk weighted assets, such as sovereign bonds and reserve deposits, affect the health of banks.
In a very low interest rate environment, our findings suggest that more flex-
ible capital regulation by the monetary authority is increasingly important
in light of macroprudential policies. The policy implication of this paper is
that it presents a new macroprudential policy that promotes regional eco-
nomic growth by making the capital regulations of Japan's regional banks
more flexible. |
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| Keywords: Capital regulation, Low interest rates, Counter cyclical buffer |
JEL: E4 - Money and Interest Rates: General
G2 - Financial Institutions and Services: General |
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| Manuscript Received : Jul 23 2021 | | Manuscript Accepted : Mar 30 2023 |
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