The Effects of Quantitative Easing on Bank Lending Behavior

The paper shows that banks' exposure to large scale asset purchases, as measured by the relative prevalence of mortgage-backed securities on their books, plays an important role in their lending behavior following unconventional monetary policy shocks. Using both bank- and loan-level regressions that control for demand shocks, this paper finds very strong and significant effects of QE3 on the credit given out by highly affected commercial banks, with the former group increasing lending by about 2.8%-3.3% relative to its counterparts. The results reveal no significant impact of QE2, which is consistent with its exclusive focus on securities that are sparsely held by banks. As a likely by-product of the crisis, QE1 had a strong and significant but quantitatively smaller impact on lending than QE3. The mechanisms point to the importance of both mark-to-market equity improvements as well as additional reserve inflows for the highly exposed banks. The study concludes that banks' exposure to MBS is an important determinant of the bank-level intensity of the lending channel. The type of asset being targeted by QE has key implications for bank lending.