The $1.7 trillion worth of mortgage backed security purchases by the Federal Reserve Bank as part of quantitative easing to stabilize the U.S. economy during the financial crisis, caused a $28.2 billion reduction in corporate and industrial lending, says new research from Indraneel Chakraborty, assistant professor of finance at the School.
The finding comes at a time when the Federal Reserve is considering its strategy to reduce stimulus for a growing economy by letting bonds it purchased mature without reinvesting the proceeds. Until now, the Fed held such mortgage backed securities and treasuries even though it raised short-term interest rates.Chakraborty says businesses have experienced difficulty securing loans since the crisis due to limited bank capital and such capital being spread thin across housing and other sectors of the economy. Until now, a dollar figure was unavailable to illustrate the overall impact of quantitative easing on the reduction of commercial and industrial lending.
“For some time, companies have been left asking why they can’t get a loan even though they have great credit history, which in turn slows down the investment companies can make toward new opportunities,” said Chakraborty who conducted the study with colleagues from the Wharton School of the University of Pennsylvania, and Virginia Tech. “Knowing now how big of an impact their quantitative easing had on businesses being able to get loans, Fed policy makers should be particularly sensitive to the commercial and industrial loan market when deciding the pace at which they reduce the size of the balance sheet. If they don't do so, they could rock an already anemic C&I market.”
The study utilized balance sheet data of U.S. banks, and also micro-level loan data from all large banks in the U.S. and their loans to all public firms in the U.S.