Quantitative Easing and Financial Risk Taking: Evidence from Agency Mortgage REITs
Abstract: An emerging literature documents a link between central bank quantitative easing (QE) and financial institution credit risk-taking. This paper tests the complementary hypothesis that QE may also affect financial risk-taking. We study Agency MREITs – levered shadow banks that invest in guaranteed U.S. Agency mortgage-backed securities (MBS) principally funded with repo debt. We show that Agency MREIT growth is inversely related to the Federal Reserve’s Agency MBS purchases, reflecting investor portfolio rebalancing. We also find that these institutions increased leverage during the later stages of QE, consistent with “reaching for yield” behavior. Agency MREITs seem to concurrently adjust their liquidity and interest rate risk profiles.
File format is application/pdf
Description: Full text
Provider: Federal Reserve Bank of Dallas
Part of Series: Working Papers
Publication Date: 2020-06-30
- Working Paper Revision: Quantitative Easing and Agency MBS Investment and Financing Choices by Mortgage REITs