Quantitative Easing and Bank Risk Taking: Evidence from Lending

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.

Transmission of Quantitative Easing: The Role of Central Bank Reserves

“…In related research,Kandrac and Schlusche (2016) take a step beyond the immediate portfolio balance impact of QE on bond yields and assess the effect of the QE-induced reserve accumulation on bank-level lending and risk-taking activity in the U.S. Their results suggest that the reserve accumulation per se matters for the transmission of quantitative easing.…”

Unconventional Monetary Policy, Bank Lending, and Security Holdings: The Yield-Induced Portfolio-Rebalancing Channel

“…They show that the Bank of England's asset purchases had no impact on bank lending through this channel. Kandrac and Schlusche (2016) test for the existence of a reserve-induced portfolio rebalancing channel, where the sale of securities increases banks reserves, thus, disturbing the banks' optimal balance sheet composition. The authors exploit a regulatory change in the US that influenced the reserve distribution and find that banks increase their lending and risk-taking activity to reinstall the optimal asset and liability structure.…”

“…Following the bank lending literature (Kashyap and Stein, 2000) X i includes the logarithm of total assets, the equity to assets ratio, and the return on assets. I include the central bank reserves to assets ratio to control for any potential sales of securities by the bank to the central bank in the context of the APP and to control for a possible reserve-induced transmission channel (Kandrac and Schlusche, 2016). The deposit to assets ratio controls for another liquidity-driven transmission channel operating through deposits (Butt et al, 2014).…”

“…There is a growing body of empirical literature that examines the liquidity-driven rebalancing motive by banks (see e.g. Kandrac and Schlusche, 2016;Butt, Churm, McMahon, Morotz, and Schanz, 2014;Carpinelli and Crosignani, 2017;Andrade, Cahn, Fraisse, and Mésonnier, 2015). However, little work has been done on a rebalancing that is priceor yield-induced.…”

Bayesian analysis of Hong Kong's housing price dynamics

“…Source: Authors' estimates are not part of a systematic response as implied by the BVAR model, mortgage rate shocks in this period can be interpreted as the decline in the interest rate spread and risk premium between the benchmark interest rates and the actual mortgage rate as a result of international spillovers of unconventional monetary policy (e.g. Bauer & de los Rios, 2012;Chen, Filardo, He, & Zhu, 2012); Kandrac & Schlusche, 2016).…”