Quantitative Easing and Bank Risk Taking: Evidence from Lending

55 Pages Posted: 3 Jan 2018 Last revised: 7 Feb 2018

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: 2017-10-12

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.

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

JEL Classification: E52, E58, G21, G28

Suggested Citation

Kandrac, John and Schlusche, Bernd, Quantitative Easing and Bank Risk Taking: Evidence from Lending (2017-10-12). FEDS Working Paper No. 2017-125. Available at SSRN: https://ssrn.com/abstract=3094876 or http://dx.doi.org/10.17016/FEDS.2017.125

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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