Unconventional Monetary Policy and the Search for Yield
Posted: 9 Feb 2021 Last revised: 9 Jun 2022
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: Suggested Citation