Does quantitative easing boost bank lending to the real economy or cause other bank asset reallocation? The case of the UK

Simone Giansante (), Mahmoud Fatouh () and Steven Ongena
Additional contact information
Simone Giansante: School of Management, University of Bath
Mahmoud Fatouh: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH

No 883, Bank of England working papers from Bank of England

Abstract: We investigate the impact of the asset purchase program (APP) introduced by the Bank of England (BOE) in 2009 on the composition of assets of UK banks, and the implications for bank lending to the real economy, using a unique database on the program. Knowing the identity of the banks that receive reserves injections through the BOE’s APP (QE banks) provides us with an ideal empirical design for a difference-in-differences exercise. The Monetary Policy Committee (MPC) didn’t expect there to be strong transmission of the APP’s impact through the bank lending channel. In line with that, we find no evidence that suggests that QE directly boosted bank lending to the real economy, even when controlling fully for demand-side effects. The overall reduction of retail lending is more pronounced for treated (QE) banks than for the control group. QE banks reallocated their assets towards lower risk-weighted investments, such as government securities, as suggested by the increased sensitivity of their equity returns to peripheral EU bond returns. Overall, our findings suggest that, if banks are not adequately capitalised, risk-based capital constraints can limit the transmission of expansionary unconventional monetary policies via the bank lending channel, and provide incentives for carry trade activities.

Keywords: Monetary policy; quantitative easing; bank lending (search for similar items in EconPapers)
JEL-codes: E51 G21 (search for similar items in EconPapers)
Pages: 56 pages
Date: 2020-08-14
New Economics Papers: this item is included in nep-mac and nep-mon
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Citations: View citations in EconPapers (10)

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Related works:
Working Paper: Does Quantitative Easing Boost Bank Lending to the Real Economy or Cause Other Bank Asset Reallocation? The Case of the UK (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0883

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