Does quantitative easing boost bank lending to the real economy or cause other bank asset reallocation? : the case of the UK

We investigate the impact of the Bank of England's asset purchase program (APP) on the composition of assets of UK banks, and the implications for the real economy, using a unique database on the program. Knowing the identity of the banks that receive reserves injections through APP (QE banks) provides us with an ideal empirical design for a difference-in-differences exercise. We find no evidence that suggests that QE boosted bank lending to the real economy, even when controlling fully for demand-side effects. The overall reduction of retail lending is more pronounced for treated (QE) banks than for the control group. QE banks reallocated their assets towards lower risk-weighted investments, such as government securities, as indicated by the increased sensitivity of their equity returns to peripheral EU bond returns. Overall, our findings suggest that risk-based capital constraints can limit the effectiveness of expansionary unconventional monetary policies and provide incentives for carry trade activities, when banks are not adequately capitalised