NBER, Report: The NBER Digest, June 2023 – Bank Liquidity and the Dynamics of the Fed’s Balance Sheet (Page 3)

“The researchers demonstrate, using bank-level data, that increases in banks’ central bank reserves during QE were associated with increases in the volume of demand deposits and credit lines. In contrast, they do not find that the banks that provided customers with more claims on liquidity during QE reduced those claims when QT kicked in. This dynamic was particularly driven by less well-capitalized banks, which maintained their provision of liquidity claims to customers even as their reserves declined. These banks may have been less risk averse on account of their weaker balance sheet positions.”

“The researchers conclude that QE and QT are not mirror images of each other. The two policies change banks’ liquidity- seeking behavior in different ways, and differently for different banks. This asymmetry is also manifest in the recent failures of banks such as Silicon Valley Bank and Signature Bank that grew their uninsured deposit base during the pandemic QE but did not decrease it sufficiently during the monetary tightening phase of 2022. Such asymmetric bank behavior complicates the use of the Federal Reserve’s balance sheet as a tool for monetary stimulus.”