Quantitative easing linked to increased security lending facility use

The paper empirically finds a close link between quantitative easing (QE) expansion and higher usage of securities lending facilities (SLF).

Using confidential, granular transaction data from the Swedish SLF, the study shows that in months where the QE portfolio increased, there was a marked increase in facility usage, roughly corresponding to half the size of the purchase.

A decrease in the spread between the repo market rate and the SLF yield also increases facility usage, making the SLF yield the de facto floor of secured lending rates.

This evidence, combined with systematic rolling of repo contracts by primary dealers, indicates the SLF is being used as a first-resort mechanism rather than its intended backstop function.

This may have long-term implications for market functioning and monetary policy effectiveness.

A theoretical search model complements the empirical analysis, explaining the conditions under which primary dealers access the SLF and its interactions with the repo market and asset purchases under QE.

The model shows that the SLF is used during periods of excess demand for assets, especially when scarce assets are difficult to find in the OTC repo market due to search frictions.

QE further increases SLF usage, as primary dealers may use the facility to sell provided assets to the central bank, potentially leading to a build-up of short positions.

This can raise liquidity concerns and strengthens cash-borrowing dealers' bargaining position, securing lower repo borrowing rates.

The model also highlights moral hazard concerns arising from increased SLF usage.