Unconventional Monetary Policy and the Search for Yield

45 Pages Posted: 9 Feb 2021

See all articles by John Kandrac

John Kandrac

Board of Governors of the Federal Reserve System

Sotirios Kokas

University of Essex - Essex Business School

Alexandros Kontonikas

Essex Business School

Date Written: January 31, 2021

Abstract

We use U.S. syndicated loan market data to examine how banks responded to the unprecedented injection of reserves by the Fed over several rounds of quantitative easing (QE). We show that higher reserves boost bank lending. To establish a causal interpretation for this finding, we construct a novel instrument for the bank-level exposure to QE by using confidential data on daily bank reserves. Next, we identify a mechanism that can explain this link. We show that the connection between banks' reserves and lending volume depends upon the net return that banks enjoy on reserve balances. Our findings demonstrate that the search for yield component of the risk taking channel — wherein banks increase risk-taking to achieve nominal profitability targets during periods of low interest rates — is also a relevant consideration for policymakers during massive reserve injections.

Keywords: Quantitative Easing, Reserves, Syndicated Loans, Search for Yield, FDIC Regulation Change

JEL Classification: E52, G21, G28

Suggested Citation

Kandrac, John and Kokas, Sotirios and Kontonikas, Alexandros, Unconventional Monetary Policy and the Search for Yield (January 31, 2021). Available at SSRN: https://ssrn.com/abstract=3776618 or http://dx.doi.org/10.2139/ssrn.3776618

John Kandrac

Board of Governors of the Federal Reserve System ( email )

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

Sotirios Kokas (Contact Author)

University of Essex - Essex Business School ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

Alexandros Kontonikas

Essex Business School ( email )

University of Essex
Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
93
Abstract Views
391
rank
330,628
PlumX Metrics