Quantitative Easing and Bank Lending: The Liquidity Channel

47 Pages Posted: 31 Mar 2020

See all articles by Chun Kuang

Chun Kuang

University of International Business and Economics (UIBE) - School of Banking and Finance

Jiawen Yang

George Washington University

Wenyu Zhu

Renmin University of China - School of Finance

Date Written: March 13, 2020

Abstract

This paper provides direct evidence on the effect of quantitative easing (QE) policies on bank lending through the liquidity channel. By looking at changes in banks' liquidity-lending sensitivity in different rounds of QE, our results show that banks with higher levels of cash & reserve holding (especially excess reserves) are more responsive to the large-scale asset purchases (LSAPs) after the 2007-08 financial crisis, compared to their liquidity-constrained counterparts. Interestingly, we find this liquidity channel to be almost equally significant for both C&I loans and real estate lending. Our results are robust to different specifications, alternative measures of banks' liquidity constraint, and inclusion of controls for demand-side factors. Further analysis indicates that this liquidity channel is distinct from the net-worth channel and capital requirement constraint documented in the literature.

Keywords: bank lending channel, unconventional monetary policy, quantitative easing, liquidity channel

JEL Classification: E44, E52, G21, G28

Suggested Citation

Kuang, Chun and Yang, Jiawen and Zhu, Wenyu, Quantitative Easing and Bank Lending: The Liquidity Channel (March 13, 2020). Available at SSRN: https://ssrn.com/abstract=3554009 or http://dx.doi.org/10.2139/ssrn.3554009

Chun Kuang (Contact Author)

University of International Business and Economics (UIBE) - School of Banking and Finance ( email )

No.10, Huixindong Street
Chaoyang District
Beijing, 100029
China

Jiawen Yang

George Washington University ( email )

2121 I Street NW
Washington, DC 20052
United States

Wenyu Zhu

Renmin University of China - School of Finance ( email )

59 Zhongguancun Street
Beijing, 100872
China

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