Quantitative Easing and Bank Risk Taking: Evidence from Lending

Abstract We empirically test early monetary theories in which reserve creation plays a crucial role in the transmission of quantitative easing (QE). Analyzing the unprecedented injection of reserves across several Federal Reserve QE programs, we demonstrate a causal effect of bank‐level reserve accumulation on lending and risk‐taking activity. To overcome the endogeneity of bank‐level reserve increases to banks' other portfolio decisions, we employ instruments made available by a regulatory change that strongly influenced the distribution of reserves in the banking system.

Consistent with the theory, we document that reserve creation leads to higher total loan growth and increased risk taking.