QE and the Bank Lending Channel in the UK∗

We test whether Quantitative Easing (QE) provided a boost to bank lending in the UK. Using a data set available to researchers at the Bank, we use two alternative approaches to identify the effects of variation in deposits on individual banks ’ bal-ance sheets and test whether this variation in deposits boosted lending. We find no evidence to suggest that QE operated via a traditional bank lending channel (BLC) in the spirit of the model due to Kashyap and Stein. We show in a simple BLC framework that if QE gives rise to deposits that are likely to be short-lived in a given bank (‘flighty ’ deposits), then the traditional BLC is mitigated. Our analysis suggests that QE operating through a portfolio rebalancing channel gave rise to such flighty deposits and that this is a potential reason that we find no evidence of a BLC. Our evidence is consistent with other studies that QE boosted aggregate demand and inflation via portfolio rebalancing channels