Quantitative Easing Effect on Bank Profitability : A study on the relationship between quantitative easing and bank profitability in Sweden

Abstract: We analyse the effects of quantitative easing (QE) on Swedish bank profitability on the four largest banks in Sweden between 2015-2021 by utilizing daily stock prices as a proxy for bank profit. Using an event study approach, we find that QE has a significant positive effect on bank profitability in Sweden as wholesale funding conditions improve. This suggests that structural differences in bank funding have an impact on the effect of QE. Furthermore, we investigate the individual effects of QE on bank profitability. We determine that QE benefits banks with higher credit losses on their balance sheet due to improvements in debt serviceability. Finally, we complement our study by investigating how QE affects debtholders of the banks through credit default swaps (CDS). We find that QE reduces prices on CDS, therefore signalling an improvement in wholesale funding conditions. This indicates that both equity and debtholders perceive the effects of QE positively.