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Quantitative Easing and Bank Risk Taking: Evidence from Lending

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  • Kandrac, John
  • Schlusche, Bernd

Abstract

We empirically assess the effect of reserve accumulation as a result of quantitative easing (QE) on bank-level lending and risk taking activity. To overcome the endogeneity of bank-level reserve holdings to banks' other portfolio decisions, we employ instruments made available by a regulatory change that strongly influenced the distribution of reserves in the banking system. Consistent with theories of the portfolio substitution channel in which the transmission of QE depends in part on reserve creation itself, we document that reserves created in two distinct QE programs led to higher total loan growth and an increase in the share of riskier loans, such as commercial real estate, construction, C&I, and consumer loans, within banks' loan portfolios.

Suggested Citation

  • Kandrac, John & Schlusche, Bernd, 2017. "Quantitative Easing and Bank Risk Taking: Evidence from Lending," Finance and Economics Discussion Series 2017-125, Board of Governors of the Federal Reserve System (US).
    • Handle: RePEc:fip:fedgfe:2017-125
    DOI: 10.17016/FEDS.2017.125
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    File URL: https://www.federalreserve.gov/econres/feds/files/2017125pap.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Luisa Carpinelli & Matteo Crosignani, 2017. "The Effect of Central Bank Liquidity Injections on Bank Credit Supply," Finance and Economics Discussion Series 2017-038, Board of Governors of the Federal Reserve System (US).
    2. Ryan, Ellen & Whelan, Karl, 2019. "Quantitative Easing and the Hot Potato Effect: Evidence from Euro Area Banks," CEPR Discussion Papers 13499, C.E.P.R. Discussion Papers.
    3. Óscar Arce & Ricardo Gimeno & Sergio Mayordomo, 2017. "Making room for the needy: the credit-reallocation effects of the ECB’s corporate QE," Working Papers 1743, Banco de España;Working Papers Homepage.
    4. repec:eee:jfinec:v:133:y:2019:i:2:p:357-378 is not listed on IDEAS
    5. Wang, J. Christina, 2017. "Banks' search for yield in the low interest rate environment: a tale of regulatory adaptation," Working Papers 17-3, Federal Reserve Bank of Boston.
    6. AAlessio Reghezza & Jonathan Williams & Alessio Bongiovanni & Riccardo Santamaria, 2019. "Do Negative Interest Rates Affect Bank Risk-Taking?," Working Papers 19012, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
    7. Philip Molyneux & Alessio Reghezza & Ru Xie, 2018. "Bank Profits and Margins in a World of Negative Rates," Working Papers 18001, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
    8. Tischer, Johannes, 2018. "Quantitative easing, portfolio rebalancing and credit growth: Micro evidence from Germany," Discussion Papers 20/2018, Deutsche Bundesbank.

    More about this item

    Keywords

    Monetary policy; QE; bank lending; reserve balances;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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