The Role of Financial Sector on Quantitative Easing Decisions: Evidence from UK

Abstract

The paper investigates the implications arising from the responses of the financial sector in the United Kingdom to the incentives determined by quantitative easing decisions. In a panel vector autoregressive modeling framework, we examine the effects of Bank of England asset purchases on the main accounting variables for different types of financial institutions, which reflect differences in the sequencing of the quantitative easing strategy. We find that quantitative easing decisions are driven by the fluctuations in the financial institutions’ profitability and asset growth levels, which are explained by the crucial role of commercial banks. In this setting, the monetary policies made by the Bank of England are effective in easing the pressures on the banking sector and supporting the leverage of financial institutions.