Finance and Economics Discussion Series (FEDS)

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December 2017

Quantitative easing and bank risk taking: evidence from lending

John Kandrac and Bernd Schlusche

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.
Accessible materials (.zip)

Keywords: Monetary policy, QE, bank lending, reserve balances

DOI: https://doi.org/10.17016/FEDS.2017.125

PDF: Full Paper

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Last Update: January 09, 2020