The Impact of Quantitative Easing on Profitability of the U.S. Banking Industry

Abstract

ABSTRACT The severity of the 2007 financial crisis led to the implementation of quantitative easing in many countries, including the US. Even though there have been various studies on the impact of quantitative easing, research on quantitative easing and bank profitability is still limited. This paper tries to explore this novel aspect of quantitative easing via a model of profitability of banking industry. Using aggregate quarterly data from 1992Q4 to 2013Q4, this paper provides evidence that asset purchase and bank profitability are negatively correlated. This implies that quantitative easing, by purchasing a massive amount of assets, would drive down the profitability of the US banking sector. The result is shown to survive many robustness checks. However, due to some potential problems arising from the method used in this paper, further research should be carried out to confirm the exact effect of quantitative easing on bank profitability.