Abstract
This paper provides direct evidence on the effect of quantitative easing (QE) policies on bank lending through the liquidity channel. By looking at changes in banks' liquidity-lending sensitivity in different rounds of QE, our results show that banks with higher levels of cash & reserve holding (especially excess reserves) are more responsive to the large-scale asset purchases (LSAPs) after the 2007-08 financial crisis, compared to their liquidity-constrained counterparts. Interestingly, we find this liquidity channel to be almost equally significant for both C&I loans and real estate lending. Our results are robust to different specifications, alternative measures of banks' liquidity constraint, and inclusion of controls for demand-side factors. Further analysis indicates that this liquidity channel is distinct from the net-worth channel and capital requirement constraint documented in the literature.
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