QE, Bank Liquidity Risk Management, and Non-Bank Funding: Evidence from U.S. Administrative Data

Matthew Darst, Sotirios Kokas (), Alexandros Kontonikas (), José-Luis Peydró () and Alexandros Vardoulakis
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Alexandros Vardoulakis: https://www.federalreserve.gov/econres/alexandros-vardoulakis.htm

No 2025-030, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We show that the effectiveness of unconventional monetary policy is limited by how banks adjust credit supply and manage liquidity risk in response to fragile non-bank funding. For identification, we use granular U.S. administrative data on deposit accounts and loan-level commitments, matched with bank-firm supervisory balance sheets. Quantitative easing increases bank fragility by triggering a large inflow of uninsured deposits from non-bank financial institutions. In response, banks that are more exposed to this fragility actively manage their liquidity risk by offering better rates to insured deposits, while cutting uninsured rates. Doing so, they shift away from uninsured to insured deposits. Importantly, on the asset side, these banks also reduce the supply of contingent credit lines to corporate clients. This tightening of liquidity provision has real effects, as firms reliant on more exposed banks experience a reduction in liquidity insurance stemming from credit lines, leading to lower investment. Our analysis reveals that the fragility of deposit funding can disrupt the complementarity between deposit-taking and the provision of credit lines.

Keywords: Bank fragility; Liquidity risk; Liquidity Insurance; Deposits; Credit lines; Quantitative Easing; Quantitative Tightening; Non-banks (search for similar items in EconPapers)
Pages: 62 p.
Date: 2025-04-22
New Economics Papers: this item is included in nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2025-30

DOI: 10.17016/FEDS.2025.030

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