The role of leverage in quantitative easing decisions: Evidence from the UK

Abstract

The paper analyses the implications arising from the impulses and responses of the banking sector in the UK, through the banks’ portfolio balance sheet information, when determined by the quantitative easing implementation. In a panel vector autoregressive framework, we examine the effects of Bank of England's asset purchases on disaggregated leverage and bank profitability for different types of financial institutions, which reflect differences in the sequencing of the quantitative easing strategy. We find that the transmission channel of QE to the growth of economic activity depends on the degree of financial leverage, the holdings of securities and lending rates but with diverging magnitude for the different types of UK financial institutions.