Unintended side effects of unconventional monetary policy

  • Using granular supervisory data from Germany, we investigate the impact of unconventional monetary policies via central banks’ purchase of corporate bonds. While this policy results in a loosening of credit market conditions as intended by policy makers, we document two unintended side effects. First, banks that are more exposed to borrowers benefiting from the bond purchases now lend more to high-risk firms with no access to bond markets. Since more loan write-offs arise from these firms and banks are not compensated for this risk by higher interest rates, we document a drop in bank profitability. Second, the policy impacts the allocation of loans among industries. Affected banks reallocate loans from investment grade firms active on bond markets to mainly real estate firms without investment grade rating. Overall, our findings suggest that central banks’ quantitative easing via the corporate bond markets has the potential to contribute to both banking sector instability and real estate bubbles.

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Author:Tobias BergGND, Thomas KickORCiDGND, Sebastian SchreiberGND, Rainer HaselmannGND
URN:urn:nbn:de:hebis:30:3-616663
URL:https://ssrn.com/abstract=4006275
DOI:https://doi.org/10.2139/ssrn.4006275
Parent Title (English):LawFin working paper ; No. 27
Series (Serial Number):LawFin Working Paper (27)
Publisher:Center for Advanced Studies on the Foundations of Law and Finance, House of Finance, Goethe University
Place of publication:Frankfurt am Main
Document Type:Working Paper
Language:English
Year of Completion:2021
Year of first Publication:2022
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2022/01/19
Issue:December 2021
Page Number:43
Note:
This research was funded by the German Research Foundation (Deutsche Forschungsgemeinschaft, DFG) – project FOR 2774.
Institutes:Rechtswissenschaft / Rechtswissenschaft
Wirtschaftswissenschaften / Wirtschaftswissenschaften
Wissenschaftliche Zentren und koordinierte Programme / House of Finance (HoF)
Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Wissenschaftliche Zentren und koordinierte Programme / Sustainable Architecture for Finance in Europe (SAFE)
Wissenschaftliche Zentren und koordinierte Programme / DFG-Forschergruppen / Foundation of Law and Finance
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
3 Sozialwissenschaften / 34 Recht / 340 Recht
Sammlungen:Universitätspublikationen
Licence (German):License LogoDeutsches Urheberrecht