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Quantitative Easing and Bank Risk Taking: Evidence from Lending
Author(s) -
KANDRAC JOHN,
SCHLUSCHE BERND
Publication year - 2021
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12781
Subject(s) - quantitative easing , excess reserves , endogeneity , reserve requirement , monetary economics , economics , portfolio , bank reserves , official cash rate , loan , business , financial system , bank rate , monetary policy , financial economics , finance , econometrics , central bank
Abstract We empirically test early monetary theories in which reserve creation plays a crucial role in the transmission of quantitative easing (QE). Analyzing the unprecedented injection of reserves across several Federal Reserve QE programs, we demonstrate a causal effect of bank‐level reserve accumulation on lending and risk‐taking activity. To overcome the endogeneity of bank‐level reserve increases to banks' other portfolio decisions, we employ instruments made available by a regulatory change that strongly influenced the distribution of reserves in the banking system. Consistent with the theory, we document that reserve creation leads to higher total loan growth and increased risk taking.