Unconventional Monetary Policy and the Search for Yield

Posted: 9 Feb 2021 Last revised: 9 Jun 2022

See all articles by Sotirios Kokas

Sotirios Kokas

University of Essex - Essex Business School

Alexandros Kontonikas

Essex Business School

Date Written: January 31, 2019

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

Kokas, Sotirios and Kontonikas, Alexandros, Unconventional Monetary Policy and the Search for Yield (January 31, 2019). Available at SSRN: https://ssrn.com/abstract=3776618 or http://dx.doi.org/10.2139/ssrn.3776618

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

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