Banking under large excess reserves (JMP)
Draft available soon: We examine the effects of quantitative easing (QE) on bank lending in the Eurozone. QE has substantially increased central bank reserves held by commercial banks and raised the volume of short-term wholesale deposits, which made bank funding less stable. Basel III regulation complicates how large volumes of excess reserves and short-term wholesale deposits influence bank lending. We develop a structural model incorporating imperfect competition in credit and deposit markets and regulatory costs that escalate as banks approach minimum requirements. This framework allows us to quantify how excess reserves contribute to regulatory costs. In France, QE increased the marginal cost of long-term lending by 16 basis points in Q4 2021. Counterfactual analysis indicates that maintaining central bank reserves at 2 trillion euros instead of 4 trillion could have boosted aggregate bank lending by approximately 5% in Q4 2021.