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

In the aftermath of the subprime mortgage bubble, the Federal Reserve implemented large-scale asset purchase (LSAP) programs 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 heterogeneous effects across different rounds of QE. In particular, during the third round of QE, banks that were more exposed to unconventional monetary policy through mortgage-backed securities (MBS) purchases 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.