The impact of quantitative easing on UK bank lending: Why banks do not lend to businesses?

Mahmoud Fatouh, Sheri Markose and Simone Giansante

Journal of Economic Behavior & Organization, 2021, vol. 183, issue C, 928-953

Abstract: The growing proportion of UK bank lending to the financial sector reached a peak in 2007 just before the onset of the Global Financial Crisis (GFC). This marks a trend in the dwindling amount of bank lending to private sector non-financial corporations (PNFCs), which was exacerbated with the Great Recession. Many central banks aimed to revive bank lending with quantitative easing (QE) and unconventional monetary policy. We propose an agent based computational economics (ACE) model which combines the main factors in the economic environment of QE and Basel regulatory framework to analyse why UK banks do not prioritize lending to non-financial businesses. The lower bond yields caused by QE encourage big firms to substitute away from bank borrowing to bond issuance. In addition, the risk weight regime of Basel II/III on capital induces banks to favour mortgages over business loans to small and medium enterprises (SMEs). The combination of lower bond yields and Basel II/III capital requirements on banks, which, respectively, impact demand and supply of credit in the UK, plays a role in the drop of bank loans to businesses. The ACE model aims to reinstate policy regimes that form constraints and incentives for the behaviour of market participants to provide the causal factors in observed macro-economic phenomena.

Keywords: Monetary policy; Quantitative easing: bank lending; Agent-based modelling; Gilt yields; Capital adequacy requirements; Risk weighted assets (search for similar items in EconPapers)
JEL-codes: E51 E52 E58 G02 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0167268119300538
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:183:y:2021:i:c:p:928-953

DOI: 10.1016/j.jebo.2019.02.023

Access Statistics for this article

Journal of Economic Behavior & Organization is currently edited by Houser, D. and Puzzello, D.

More articles in Journal of Economic Behavior & Organization from Elsevier
Bibliographic data for series maintained by Catherine Liu ().