Quantitative Easing and Agency MBS Investment and Financing Choices by Mortgage REITs

W Frame and Eva Steiner

No 2020, Working Papers from Federal Reserve Bank of Dallas

Abstract: An emerging literature documents a link between central bank quantitative easing (QE) and financial institution credit risk-taking. This paper tests the complementary hypothesis that QE may also affect financial risk-taking. We study Agency MREITs – levered shadow banks that invest in guaranteed U.S. Agency mortgage-backed securities (MBS) and that are principally funded with repo debt. We first show that Agency MREIT asset growth is inversely related to the Federal Reserve’s Agency MBS purchases, reflecting investor portfolio rebalancing. We then document that Agency MREITs increased financial leverage during the later stages of QE, consistent with “reaching for yield” behavior. However, Agency MREITs countered the heightened solvency risk by extending repo maturity and increased hedging of their funding costs to reduce liquidity and interest rate risk. The findings suggest that research linking QE to increased credit risk-taking should account for contemporaneous changes in financing choices and risk management.

Keywords: Quantitative Easing; Risk Taking; GSEs; Mortgages; Agency MBS (search for similar items in EconPapers)
JEL-codes: E58 G21 G23 G28 (search for similar items in EconPapers)
Pages: 41
Date: 2020-06-30, Revised 2021-04-27
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac, nep-mon, nep-rmg and nep-ure
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Related works:
Journal Article: Quantitative easing and agency MBS investment and financing choices by mortgage REITs (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:feddwp:88322

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DOI: 10.24149/wp2020r1

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