Central bank asset purchases, banks’ risky security holdings and profitability: Macro and micro evidence from Japan and the U.S.

Abstract

By focusing exclusively on risky securities and conducting cross-country analyses at both macro and micro levels -- a different approach than those employed in the existing literature -- this paper attempts to shed light on the under-explored yet important issue of banks’ dynamic portfolio optimization in times of unconventional monetary policy. It explores how and why banks adjust their risky security holdings in the context of central bank asset purchases. The macro and micro evidence from Japan and the U.S. suggests that banks may adjust their risky security holdings to optimize their profitability over the post-global financial crisis period. Interesting differences are also found in the pattern of adjustment of risky security holdings between the two countries. These findings provide new insights not only into the risk-taking and portfolio-rebalancing channels of unconventional monetary policy, but also into the link between unconventional monetary policy and bank profitability.