Working Paper: CEPR ID: DP15367
Authors: Rafael Repullo
Abstract: This paper reviews the analysis in Brunnermeier and Koby (2018), showing that lower monetary policy rates can only lead to lower bank lending if there is a binding capital constraint and the bank is a net investor in debt securities, a condition typically satisfied by high deposit banks. It next notes that BK's capital constraint features the future value of the bank's capital, not the current value as in standard regulation. Then, it sets up an alternative model with a standard capital requirement in which profitability matters because bank capital is endogenously provided by shareholders, showing that in this model there is no reversal rate.
Keywords: monetary policy; reversal rate; negative interest rates; bank profitability; bank market power; capital requirements
JEL Codes: E52; G21; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lower policy rates (E43) | higher lending (G21) |
| binding capital constraint (G31) | no increase in lending from lower policy rates (E52) |
| reversal rate exists (F31) | bank is a net investor in debt securities (G21) |
| bank's capital structure and investment strategies (O16) | effect of lower policy rates on lending (E43) |
| bank-specific characteristics (G21) | reversal rate (E43) |