Quantitative Easing and Bank Risk Taking: Evidence from Lending

56 Pages Posted: 2 Nov 2015 Last revised: 18 May 2020

See all articles by John Kandrac

John Kandrac

Board of Governors of the Federal Reserve System

Bernd Schlusche

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: September 21, 2018

Abstract

We empirically test early monetary theories in which reserve creation plays a crucial role in the transmission of quantitative easing (QE). Analyzing the unprecedented injection of reserves across several Federal Reserve QE programs, we demonstrate a causal effect of bank-level reserve accumulation on lending and risk taking activity. To overcome the endogeneity of bank-level reserve increases 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 the theory, we document that reserve creation leads to higher total loan growth and increased risk taking.

Keywords: QE, bank lending, reserve balances, monetary policy, Federal Reserve, risk-taking channel, LSAP, portfolio substitution effect

JEL Classification: G21, E52, E58, G28

Suggested Citation

Kandrac, John and Schlusche, Bernd, Quantitative Easing and Bank Risk Taking: Evidence from Lending (September 21, 2018). Available at SSRN: https://ssrn.com/abstract=2684548 or http://dx.doi.org/10.2139/ssrn.2684548

John Kandrac (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Bernd Schlusche

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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