This study uses individual bank balance sheet data from the United States to investigate the effects of the Federal Reserve's large-scale asset purchases, which are commonly known as quantitative easing (QE), on bank lending standards and risk-taking behaviour. Covering all three phases of QE (QE1, QE2 and QE3), we find a consistent and significant reduction in bank lending standards during each phase, indicating that QE incentivised banks to extend relatively riskier loans while relaxing lending standards. We also compare the effects of QE with those of conventional monetary policy instruments, such as short-term interest rates. Despite short-term interest rates reaching the zero lower bound and continuing to influence bank risk-taking behaviour, our analysis suggests that the impact remains relatively stable over time. Consequently, we cautiously assert that QE is a more potent tool for stimulating economic activity, effectively substituting for the role of the monetary policy rate during periods when traditional monetary policy options are constrained.
Read full abstract