Quantitative Easing and Bank Lending: The Liquidity Channel

Did quantitative easing reduce the borrowing costs of firms? The risk‐taking channel

“…In column (4), we include the interaction terms between liquidity ratio and QE dummies to test the liquidity channel of QE affecting the cost of bank loans. Consistent with Kuang et al (2020), the significant coefficients indicate that the liquidity channel is another mechanism accounting for the reduction in loan costs during QE. We use the liquidity ratio of the lead bank as it plays a significant role in establishing relationships with firms and negotiating loan terms (Sufi, 2007).…”

“…They observe that the sensitivities of monetary policy and the financial crisis effects on loan origination vary across loan categories. Kuang et al (2020) find that the liquidity channel bears equal significance for both commercial and industrial (C&I) lending and mortgage lending. They also show that banks with more liquidity options such as cash and reserve holding are more reactive to the Fed asset purchases.…”

“…This is different from Paligorova and Santos (2017) who study the effect of conventional monetary policy on US corporate loan pricing before the 2008–2009 financial crisis. Second, previous literature on bank risk taking during QEs (Chakraborty et al, 2020; Kuang et al, 2020) focuses on how QE impacts the number of loan originations and issuance. We document the QE effects on loan spreads and the total cost of borrowing in this paper and study banks' risk taking directly through loan pricing policies.…”