Abstract
We study the effects of the US Federal Reserve’s large-scale asset purchase programs during 2008-2014 on bank liquidity creation. Banks create liquidity when they transform the liquid reserves resulted from quantitative easing into illiquid assets. As the composition of banks’ loan portfolio affects the amount of liquidity it creates, the impact of quantitative easing on liquidity creation is not a priori clear. Using a difference-in-difference identification strategy, we find that banks that were more exposed to the policy increased lending relative to a control group. However, while the increase in lending was present across all three rounds of quantitative easing, we only find a strong effect on liquidity creation during the last round. This suggests, that during the first two rounds, affected banks transformed the reserves created through the asset purchase program into less illiquid assets, such as real estate mortgages, pointing to a weaker impact of the policy on the real economy.
Highlights
Following the 2008-09 Global Financial Crisis, a growing number of central banks have included large-scale asset purchase programs (LSAPs) in their toolkit of unconventional monetary policies
We consider the effects of the three rounds of quantitative easing (QE) on lending, distinguishing between total lending, real estate (RE) loans and commercial and industrial (C&I) loans
We study the effects of large scale asset purchases on bank liquidity creation
Summary
Following the 2008-09 Global Financial Crisis, a growing number of central banks have included large-scale asset purchase programs (LSAPs) in their toolkit of unconventional monetary policies. The US Federal Reserve, in particular, implemented several rounds of quantitative easing (QE) through which they purchased both agency mortgage-backed securities (MBS) and Treasury securities.. The scale and unprecedented use of these unconventional policies has led to a large interest in understanding their effect on the banking sector and the real economy. Quantitative easing can lead to an increase in credit supply through a classical bank lending channel, as the new reserves and/or customer deposits created by QE represent a relatively cheap source of funding for banks, which can result in a shift in loan supply (Kashyap and Stein, 2000; Butt et al, 2014; Kandrac and Schlusche, 2017).. Chakraborty et al (2020), on the other hand, find that the increase in mortgage lending
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