Investors’ expectations around quantitative easing: does liquidity injection affect European banks equally?

Abstract The role of liquidity in the banking industry is increasingly under spotlight since Global Financial Crisis (GFC) 2007. Prior evidence offers contrasting findings on played by banks: whilst it ensures systemic financial stability, at same time raises agency costs. Notwithstanding this, European banks benefited from a generous injection following launch Quantitative Easing (QE) programme Central Bank (ECB) 2015–2016. We leverage release QE and investigate whether investors’ reactions to announcements new injections vary according bank-level characteristics namely, their soundness, asset portfolio quality level transparency. Our document an overall negative market reaction announcements; more fine-grained analysis we highlight that falling short regulatory requirements are not expected benefit additional liquidity. This study contributes literature showing important boundary conditions beneficial banks, is—because capital requirements—liquidity only valuable investors if can be reinvested once constraints overcome.