The Tension between Monetary Policy and Financial Stability: Evidence from Agency Mortgage REITs
Frame, W. Scott; Steiner, Eva
The prolonged use of unconventional monetary policies since the financial crisis has resulted in concerns about the potential for such policy accommodation to undermine financial stability. Recent research identifying a “risk-taking channel” of monetary policy suggests that rapidly growing shadow banking organizations are of particular concern. In this paper, we study Agency mortgage REITs (Agency MREITs), which are specialized, tax-exempt financial institutions, whose rapid growth raised systemic risk concerns by the Financial Stability Oversight Council. After controlling for key variables that drive the Agency MREIT business (level, slope, and expected volatility of the term structure as well as the mortgage yield spread) we find that the growth (and associated equity issuance) of these institutions was concentrated during QE2 and reversed course following the implementation of QE3 and on through asset purchase tapering. We also show that Agency MREIT equity returns rose during QE1 and into QE2 (likely owing to gains on existing holdings), but then declined during the Maturity Extension Program, QE3, and tapering periods. Dividend yields, which are negatively related to the policy rate and positively related to the slope of the term structure, declined during both QE2 and QE3. In terms of risk-taking, Agency MREITs decreased their leverage during QE1. While these institutions increased their use of repo financing during the MEP, QE3, and Tapering periods, this was not concentrated in the shortest tenors.
monetary policy; financial stability; REITS; GSES; mortgages; securitization; JEL E58; JEL G21; JEL G23; JEL G28
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