QE lead banks to relax their lending standards ? Evidence from the Federal Reserve ’ s LSAPs

Using confidential loan officer survey data on lending standards and internal risk ratings on loans, we document an effect of large-scale asset purchase programs (LSAPs) on lending standards and risk-taking. We exploit cross-sectional variation in banks’ holdings of mortgage-backed securities to show that the first and third round of quantitative easing (QE1 and QE3) significantly lowered lending standards and increased loan risk characteristics. The magnitude of the effects is about the same in QE1 and QE3, and is comparable to the effect of a one percentage point decrease in the Fed funds target rate. ∗The views expressed in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Board of Governors of the Federal Reserve System or of anyone else associated with the Federal Reserve System. This paper has been screened to ensure that no confidential data have been disclosed. We are grateful to David Arseneau, Jose Berrospide, Elizabeth Klee, Gustavo Suarez, Egon Zakrajšek, and Rebecca Zarutskie for helpful comments. We thank Edward Kim and Tyler Wake for excellent research assistance. †Division of Monetary Affairs, [email protected] ‡Division of Financial Stability, [email protected] §Division of Research and Statistics, [email protected] 1