Quantitative `flooding' and bank lending: Evidence from 18 years of near-zero interest rate

At a near-zero interest rate, how do commercial loans react to a flood of excess supply of reserves? It is important to know the answer to this question if one wishes to evaluate the impact of quantitative easing, a version of unconventional monetary policy conducted by many central banks around the world in recent years. This paper utilizes a panel data on bank balance sheets from Japan, a country which has been at a near-zero interest rate for almost 18 years. I first estimate the amount of excess reserves for each bank. I then ask how bank lending reacts when the supply of such excess reserves increases. I find that an average bank does tend to increase its commercial loans in such a case, though the response is small in magnitude. A further analysis reveals that the impact is heterogeneous across financial institutions: it is mainly banks with lesser creditworthiness that respond to the increased supply of reserves. This suggests that the Japanese "quantitative easing" might have actually worked as a kind of a "(localized) credit easing" policy, and that a more targeted supply of reserves could augment its effectiveness.