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Does Quantitative Easing Boost Bank Lending to the Real Economy or Cause Other Bank Asset Reallocation? The Case of the UK

Author

Listed:
  • Simone Giansante

    (University of Bath - School of Management)

  • Mahmoud Fatouh

    (University of Essex; Bank of England)

  • Steven Ongena

    (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR))

Abstract

We investigate the impact of the Bank of England’s asset purchase program (APP) on the composition of assets of UK banks, and to the implications for the real economy, using a unique database on the program. The identification of banks that receives deposits (QE banks) injections by the program as well as the magnitude of these injections provides the ideal empirical design for a difference-in-difference matching exercise. We find no evidence that suggests QE boosted bank lending to the real economy. The overall reduction of retail lending was more pronounce for treated (QE) banks than for the control group. QE banks reallocated their assets towards lower risk weighted investments, such as government securities and reserves, as confirmed by the increased sensitivity of their equity returns on peripheral EU bond returns. Our findings suggest that risk weighted based capital constraints can limit the effectiveness of expansionary unconventional monetary policies and provide incentives on carry trade activities.

Suggested Citation

  • Simone Giansante & Mahmoud Fatouh & Steven Ongena, 2019. "Does Quantitative Easing Boost Bank Lending to the Real Economy or Cause Other Bank Asset Reallocation? The Case of the UK," Swiss Finance Institute Research Paper Series 19-72, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1972
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    Cited by:

    1. Bonciani, Dario & Oh, Joonseok, 2023. "Revisiting the New Keynesian policy paradoxes under QE," European Economic Review, Elsevier, vol. 154(C).
    2. Andrew Bailey & Jonathan Bridges & Richard Harrison & Josh Jones & Aakash Mankodi, 2020. "The central bank balance sheet as a policy tool: past, present and future," Bank of England working papers 899, Bank of England.
    3. Bell, Jennifer & Battisti, Giuliana & Guin, Benjamin, 2023. "The greening of lending: Evidence from banks’ pricing of energy efficiency before climate-related regulation," Economics Letters, Elsevier, vol. 230(C).
    4. Horst Maximilian & Neyer Ulrike, 2019. "The Impact of Quantitative Easing on Bank Loan Supply and Monetary Policy Implementation in the Euro Area," Review of Economics, De Gruyter, vol. 70(3), pages 229-265, December.
    5. William F. Mitchell, 2020. "Debt and Deficits—A Modern Monetary Theory Perspective," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 53(4), pages 566-576, December.
    6. Fatouh, Mahmoud & Giansante, Simone & Ongena, Steven, 2021. "Economic support during the COVID crisis. Quantitative easing and lending support schemes in the UK," Economics Letters, Elsevier, vol. 209(C).
    7. Marcel Barmeier & Juraj Falath & Alena Kissova & Adriana Lojschova, 2023. "Impact of TLTRO III on bank lending: The Slovak experience," Working and Discussion Papers WP 2/2023, Research Department, National Bank of Slovakia.
    8. Sam Miller & Boromeus Wanengkirtyo, 2020. "Liquidity and monetary transmission: a quasi-experimental approach," Bank of England working papers 891, Bank of England.
    9. Horst, Maximilian & Neyer, Ulrike, 2019. "The impact of quantitative easing on bank loan supply and monetary policy implementation in the euro area," DICE Discussion Papers 325, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    10. Pawe³ Œliwiñski, 2023. "Endogenous money supply, global liquidity and financial transactions: Panel evidence from OECD countries," Equilibrium. Quarterly Journal of Economics and Economic Policy, Institute of Economic Research, vol. 18(1), pages 121-152, March.
    11. Naiborhu, Elis Deriantino & Ulfa, Dhanita, 2023. "The lending implication of a funding for lending scheme policy during COVID-19 pandemic: The case of Indonesia Banks," Economic Analysis and Policy, Elsevier, vol. 78(C), pages 1059-1069.
    12. Jennifer Bell & Giuliana Battisti & Benjamin Guin, 2023. "The greening of lending: mortgage pricing of energy transition risk," Bank of England working papers 1016, Bank of England.

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    Keywords

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    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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