Effects of Unconventional Monetary Policy on Financial Institutions

Abstract

Monetary policy affects the real economy in part through its effects on financial institutions. High-frequency event studies show that the introduction of unconventional monetary policy in the winter of 2008-09 had a strong, beneficial impact on banks and, especially, on life insurance companies. I interpret the positive effects on life insurers as evidence that expansionary policy helped to recapitalize the sector by raising the value of legacy assets. Expansionary policy had small positive or neutral effects on banks and life insurers during the period 2010-13. The interaction of low nominal interest rates and administrative costs forced money market funds to waive fees, producing a possible incentive to reach for yield to reduce waivers. I show that money market funds with higher costs did reach for higher returns in 2009-11, but not thereafter. Some private defined-benefit pension funds increased their risk taking beginning in 2009, but again such behavior largely dissipated by 2012. In sum, unconventional monetary policy helped to stabilize some sectors and provoked modest additional risk taking in others. I do not find evidence that riskiness of the financial institutions studied fomented a trade-off between expansionary policy and financial stability at the end of 2013. 5. Testimony of Chairman Ben S. Bernanke before the Joint Economic Committee,

Comment on: “Dealer balance sheets and bond liquidity provision” by Adrian, Boyarchenko and Shachar

“…Goldstein, Jiang and Ng (2016) notes that corporate bond funds exhibit outflows that are more sensitive to bad performance, especially when market A C C E P T E D M A N U S C R I P T 2 illiquidity is high, than their inflows are sensitive to good performance. Furthermore, the Fed's low-interest-rate policy led investors to reach for yield by investing in bond funds, which tend to be vulnerable to rising interest rates (Chodorow-Reich, 2014 andKacperczyk, 2017). Thus, this risk transfer from banks-dealers to asset managers might then lead to shocks amplification with bond funds running through the exits.…”

Supply of bank loans and business debts: A view from historical bankruptcy cases

“…Bank distress reduces the supply of bank loans and raises the cost of credit for businesses. It is clear that credit constraints during banking crises have a negative effect on businesses (Carvalho, Ferreira, & Matos, 2015;Chodorow-Reich, 2014;Ivashina & Scharfstein, 2010); however, the contraction of bank lending is not only associated with crises. Adverse shocks to bank balance sheets, which may occur in any stage of the business cycle, can cause banks to reallocate resources toward liquid assets and safe investments.…”

The interplay between quantitative easing, risk and competition: The case of Japanese banking

“…Low short‐term interest rates prior to loan issuance result in banks granting more new risky loan portfolios, distorting their credit supply to favour borrowers with worse credit histories, lower ex‐ante internal ratings, and weaker ex‐post performance (Ioannidou, Ongena, & Peydró, ; Jiménez, Ongena, Peydró, & Saurina, ). Less return from yields is another motive for financial institutions to accelerate their risk‐taking activities (Chodorow‐Reich, ; Rajan, ). Banking surveys based on credit standards in the US and the UK, on the contrary, do not suggest an excessive risk‐taking by banks as a result of the enforcement of quantitative easing (Claeys & Darvas, ).…”