Did QE lead banks to relax their lending standards? Evidence from the Federal Reserve’s LSAPs

• Published in: Journal of banking & finance 2022-05, Vol.138, p.105403, Article 105403
• Main Authors: Kurtzman, Robert, Luck, Stephan, Zimmermann, Tom
• Format: Article
• Language: English
• Subjects: Bank lending standards; Bank risk taking; Quantitative easing; Unconventional monetary policy
• ISSN: 0378-4266; 1872-6372
• DOI: 10.1016/j.jbankfin.2018.08.009

•Research question: This paper provides evidence on how the Federal Reserve’s LSAPs, referred to as QE, affected lending standards.•Results:•We provide evidence that the first and third round of quantitative easing (QE1 and QE3) led to a lowering of lending standards and increased risk-taking by those banks that had relatively more mortgage-backed securities (MBS) on their books.•The effect is roughly comparable to the effect of a one percentage point decrease in the Fed funds target rate during times of conventional monetary policy. Using confidential loan officer survey data on lending standards and internal risk ratings on loans, we document an effect of large-scale asset purchase programs (LSAPs) on lending standards and risk-taking. We exploit cross-sectional variation in banks’ holdings of mortgage-backed securities to show that the first and third round of quantitative easing (QE1 and QE3) significantly lowered lending standards and increased loan risk characteristics. The magnitude of the effects is about the same in QE1 and QE3, and is comparable to the effect of a one percentage point decrease in the Fed funds target rate.