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Did QE Lead to Lax Bank Lending Standards? Evidence from the Federal Reserve's LSAPs

48 Pages Posted: 11 May 2017 Last revised: 5 Jul 2017

Robert J. Kurtzman

Board of Governors of the Federal Reserve System

Stephan Luck

Board of Governors of the Federal Reserve System

Tom Zimmermann

Federal Reserve Board

Date Written: June 16, 2017

Abstract

Using confidential loan officer survey data on lending standards and internal risk ratings on loans, we document an effect of large-scale asset purchase programs (LSAPs) on lending standards and risk-taking. We exploit cross-sectional variation in banks’ holdings of mortgage-backed securities to show that the first and third round of quantitative easing (QE1 and QE3) significantly lowered lending standards and increased loan risk characteristics. The magnitude of the effects is about the same in QE1 and QE3, and is comparable to the effect of a one percentage point decrease in the Fed funds target rate.

Keywords: QE, Banks, Risk, SLOOS, STBL

JEL Classification: E43, E52, G21

Suggested Citation

Kurtzman, Robert J. and Luck, Stephan and Zimmermann, Tom, Did QE Lead to Lax Bank Lending Standards? Evidence from the Federal Reserve's LSAPs (June 16, 2017). Available at SSRN: https://ssrn.com/abstract=2966362 or http://dx.doi.org/10.2139/ssrn.2966362

Robert Kurtzman (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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

Stephan Luck

Board of Governors of the Federal Reserve System ( email )

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

Tom Zimmermann

Federal Reserve Board ( email )

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

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