Banking under large excess reserves

Abstract

This paper builds a structural model that investigates how the expansion of central bank reserves, induced by quantitative easing (QE), impacts bank lending and deposit-taking activities under the Basel III regulatory framework. We combine detailed French credit registry data and eurozone- level bank balance sheet data to analyze the interaction of regulatory constraints with QE. Our model allows for the structural estimation of regulatory costs, which serve as the building blocks of our cost function. The initial results indicate that the injection of excess reserves is especially costly for banks under negative interest rates and facing leverage constraints. Our structural estimates indicate that while expansionary at first, central bank reserves start to crowd-out credit after a threshold. At the peak of Covid QE, central bank reserves accounted for more than 20% of the cost of providing long-term credit. --