The History and Economics of Safe Assets

Gorton, Gary

doi:10.2139/ssrn.2770569

Cited by 69 publications

(81 citation statements)

References 167 publications

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“…I argue that an increase in the demand for safe assets reallocates more U.S. Treasuries to the non-financial sector, reducing the amount of repo issuance. Moreover, I find that the Federal Reserve's overnight and term reverse repo program 1 See Gorton (2016) for a detailed description of the literature's history and terminology.…”

Section: Introductionmentioning

confidence: 99%

Private Money Creation with Safe Assets and Term Premia

Infante

2017

FEDS

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It has been documented that an increase in the demand for safe assets induces the private sector to create more money-like claims. Focusing on private repos backed by U.S. Treasury securities, I show that an increase in the demand for safe assets leads to a decreases in the issuance of Treasury repos. The intuition is that Treasury securities already function as a safe asset, thus in terms of safe asset creation, private Treasury repos are neutral. In the model, Treasury repos are beneficial because they shift risk (i.e. term premia) from relatively risk averse households to a more risk tolerant financial sector, which issues repos to finance its portfolio. When the demand for safe assets increases, Treasury securities are reallocated to households, reducing the amount of Treasury repo issued by the financial sector. By contrast, Treasury repos created by the Federal Reserve's RRP program-a safe asset created by the public sector-increase with the demand for safe assets. I show the data supports the model's main predictions. *

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Section: Introductionmentioning

confidence: 99%

Private Money Creation with Safe Assets and Term Premia

Infante

2017

FEDS

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“…By screening and monitoring borrowers, lenders can discriminate borrowers with lower credit worthiness thereby enforcing market discipline (Calomiris, 1999;Rochet and Tirole, 1996). In contrast, secured lending is less or not information sensitive (Dang, Gorton, and Holmström, 2012;Gorton and Ordoñez, 2014) and repos can be considered safe assets as they can be valued without expensive and prolonged analysis (Gorton, 2016), and serve as a store of value (Nagel, 2016). 3 This is especially true in Europe, where the largest part of the repo market (analyzed in this paper) has a particularly resilient infrastructure (Mancini, Ranaldo, and Wrampelmeyer, 2016;Bank of International Settlements, 2017), including (i) central clearing that eliminates direct credit risk exposures between borrowers and lenders, (ii) anonymous trading impeding counterparty identification and monitoring, and (iii) safe collateral.…”

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confidence: 99%

Unsecured and Secured Funding

2016

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We empirically investigate why wholesale funding is fragile by providing the first study of how individual banks borrow and lend in the euro unsecured and secured interbank market. Consistent with theories in which lenders enforce market discipline by monitoring counterparty credit risk and theories highlighting that secured loans are less informational sensitive, we find that banks with low credit worthiness replace unsecured borrowing with secured loans. Moreover, riskier lenders provide more secured loans to replace unsecured lending, which is not consistent with speculative or precautionary liquidity hoarding theories. Instead, lenders are precautionary in the sense that they prefer to lend against safe collateral.

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“…Due to global investment and savings imbalances between developed and emerging market economies, 1 a shortage of safe assets partially explains the low level of interest rates, including the natural real rate, in many countries, as argued by Caballero et al (2017). 2 This may in turn have implications for financial stability through reach for yield by investors, as discussed in Gorton (2017). Furthermore, since nominal yields are constrained by a lower bound near zero, a lack of safe assets may also be one of the factors that have contributed to constraining monetary policy around the world since the global financial crisis.…”

Section: Introductionmentioning

confidence: 99%

The Safety Premium of Safe Assets

Christensen¹,

Mirkov²

2021

ERWP

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Safe assets usually trade at a premium thanks to their high credit quality and deep liquidity. To understand the role of credit quality for such premia, we focus on Swiss Confederation bonds, which are extremely safe, but not particularly liquid. We therefore refer to their premia as safety premia and quantify them using an arbitrage-free term structure model that accounts for time-varying premia in individual bond prices. The estimation results show that Swiss safety premia are large and exhibit long-lasting trends.

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The History and Economics of Safe Assets

Cited by 69 publications

References 167 publications

Private Money Creation with Safe Assets and Term Premia

Private Money Creation with Safe Assets and Term Premia

Unsecured and Secured Funding

The Safety Premium of Safe Assets

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