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Effects of Unconventional Monetary Policy on Financial Institutions

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  • Gabriel Chodorow-Reich

Abstract

Monetary policy affects the real economy in part through its effects on financial institutions. High frequency event studies show the introduction of unconventional monetary policy in the winter of 2008-09 had a strong, beneficial impact on banks and especially on life insurance companies. I interpret the positive effects on life insurers as expansionary policy recapitalizing the sector by raising the value of legacy assets. Expansionary policy had small positive or neutral effects on banks and life insurers through 2013. The interaction of low nominal interest rates and administrative costs forced money market funds to waive fees, producing a possible incentive to reach for yield to reduce waivers. I show money market funds with higher costs reached for higher returns in 2009-11, but not thereafter. Some private defined benefit pension funds increased their risk taking beginning in 2009, but again such behavior largely dissipated by 2012. In sum, unconventional monetary policy helped to stabilize some sectors and provoked modest additional risk taking in others. I do not find evidence that the financial institutions studied formented a tradeoff between expansionary policy and financial stability at the end of 2013.

Suggested Citation

  • Gabriel Chodorow-Reich, 2014. "Effects of Unconventional Monetary Policy on Financial Institutions," NBER Working Papers 20230, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:20230
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    References listed on IDEAS

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    1. Itamar Drechsler & Alexi Savov & Philipp Schnabl, 2014. "A Model of Monetary Policy and Risk Premia," NBER Working Papers 20141, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Afonso, António & Arghyrou, Michael G. & Gadea, María Dolores & Kontonikas, Alexandros, 2018. "“Whatever it takes” to resolve the European sovereign debt crisis? Bond pricing regime switches and monetary policy effects," Journal of International Money and Finance, Elsevier, vol. 86(C), pages 1-30.
    2. repec:eee:moneco:v:95:y:2018:i:c:p:49-71 is not listed on IDEAS
    3. Alin Marius Andries & Andreas M. Fischer & Pinar Yesin, 2015. "The impact of international swap lines on stock returns of banks in emerging markets," Working Papers 16.01, Swiss National Bank, Study Center Gerzensee.
    4. Tobias Adrian & Nellie Liang, 2014. "Monetary Policy, Financial Conditions, and Financial Stability," IMES Discussion Paper Series 14-E-13, Institute for Monetary and Economic Studies, Bank of Japan.
    5. Foley-Fisher, Nathan & Ramcharan, Rodney & Yu, Edison, 2016. "The impact of unconventional monetary policy on firm financing constraints: Evidence from the maturity extension program," Journal of Financial Economics, Elsevier, vol. 122(2), pages 409-429.
    6. Buchholz, Manuel & Schmidt, Kirsten & Tonzer, Lena, 2017. "Do conventional monetary policy instruments matter in unconventional times?," IWH Discussion Papers 12/2017, Halle Institute for Economic Research (IWH).
    7. repec:eee:moneco:v:89:y:2017:i:c:p:110-112 is not listed on IDEAS
    8. Masazumi Hattori & Andreas Schrimpf & Vladyslav Sushko, 2016. "The Response of Tail Risk Perceptions to Unconventional Monetary Policy," American Economic Journal: Macroeconomics, American Economic Association, vol. 8(2), pages 111-136, April.
    9. Liangliang Jiang & Ross Levine & Chen Lin, 2017. "Does Competition Affect Bank Risk?," NBER Working Papers 23080, National Bureau of Economic Research, Inc.
    10. Oleksiy Kryvtsov & Miguel Molico & Ben Tomlin, 2015. "On the Nexus of Monetary Policy and Financial Stability: Recent Developments and Research," Discussion Papers 15-7, Bank of Canada.
    11. Emmanuel C. Mamatzakis & Anh N. Vu, 2017. "The interplay between quantitative easing and risk: the case of the Japanese banking," Working Papers 226, Bank of Greece.
    12. repec:eee:jbfina:v:89:y:2018:i:c:p:94-104 is not listed on IDEAS
    13. Littke, Helge C. N. & Ossandon Busch, Matias, 2018. "Banks fearing the drought? Liquidity hoarding as a response to idiosyncratic interbank funding dry-ups," IWH Discussion Papers 12/2018, Halle Institute for Economic Research (IWH).
    14. Gabriel Jiménez & Enrique Moral-Benito & Raquel Vegas, 2018. "Bank lending standards over the cycle: the role of firms’ productivity and credit risk," Working Papers 1811, Banco de España;Working Papers Homepage.
    15. Boubaker, Sabri & Gounopoulos, Dimitrios & Nguyen, Duc Khuong & Paltalidis, Nikos, 2017. "Assessing the effects of unconventional monetary policy and low interest rates on pension fund risk incentives," Journal of Banking & Finance, Elsevier, vol. 77(C), pages 35-52.
    16. repec:eee:dyncon:v:86:y:2018:i:c:p:165-184 is not listed on IDEAS
    17. repec:eee:jfinec:v:129:y:2018:i:1:p:87-110 is not listed on IDEAS
    18. Cifarelli, Giulio & Paladino, Giovanna, 2016. "Time-varying mark-up and the ECB monetary policy transmission in a highly non linear framework," International Review of Economics & Finance, Elsevier, vol. 45(C), pages 247-262.
    19. Di Maggio, Marco & Kacperczyk, Marcin, 2017. "The unintended consequences of the zero lower bound policy," Journal of Financial Economics, Elsevier, vol. 123(1), pages 59-80.
    20. Mamatzakis, Emmanuel & Bermpei, Theodora, 2016. "What is the effect of unconventional monetary policy on bank performance?," Journal of International Money and Finance, Elsevier, vol. 67(C), pages 239-263.

    More about this item

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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