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QE: Implications for Bank Risk-Taking, Profitability, and Systemic Risk

Author

Listed:
  • Supriya Kapoor

    (Technological University Dublin)

  • Adnan Velic

    (Technological University Dublin)

Abstract

In the aftermath of the sub-prime mortgage bubble, the Federal Reserve implemented large scale asset purchase (LSAP) programmes that aimed to increase bank liquidity and lending. The excess liquidity created by quantitative easing (QE) in turn may have stimulated bank risk-taking in search of higher profits. Using comprehensive data on balance sheets, risk measures, and daily market returns in the U.S., we investigate the link between QE, bank risk-taking, profitability, and systemic risk. We find that, particularly during the third round of QE, banks that were more exposed to the unconventional monetary policy increased their risk-taking behavior and profitability. However, these banks also reduced their contribution to systemic risk indicating that the implementation of QE had an overall stabilizing effect on the banking sector. These results highlight the different distributional effects of QE.

Suggested Citation

  • Supriya Kapoor & Adnan Velic, 2022. "QE: Implications for Bank Risk-Taking, Profitability, and Systemic Risk," Trinity Economics Papers tep0122, Trinity College Dublin, Department of Economics.
    • Handle: RePEc:tcd:tcduee:tep0122
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    File URL: https://www.tcd.ie/Economics/TEP/2022/TEP0122.pdf
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    References listed on IDEAS

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    Cited by:

    1. Marie Finnegan & Supriya Kapoor, 2023. "ECB unconventional monetary policy and SME access to finance," Small Business Economics, Springer, vol. 61(3), pages 1253-1288, October.

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    More about this item

    Keywords

    large-scale asset purchases; quantitative easing; bank risk-taking; systemic risk; expected shortfall;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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