This paper aims to evaluate the effects of the Federal Reserve monetary expansion over thepast 15 years on the credit channel of monetary policy transmission. To do so, we analyze the allocation of the Fed vast liquidity injections by the U.S. banks. The underlying hypothesis is that the considerable monetary expansion neutralized the bank credit expansion as banks channeled borrowed liquidity into other assets.

The monetary expansion was propelled by the financial crisis of 2007–2008. The crisis led to the rapid deterioration of asset performance and liquidity of the banking system. Among the key factors contributing to the crisis was the excessive accumulation of US household debt that reached 136% of households’ disposable income by mid-2007). Nevertheless, the crisis necessitated further monetary easing, even though the household debt reached an apparent ceiling. In order to provide liquidity to the banking system the Fed employed unconventional monetary policy tools.