Search Results
Working Paper
Investor Demands for Safety, Bank Capital, and Liquidity Measurement
We construct a model of a bank's optimal funding choice, where the bank negotiates with both safety-driven short-term bondholders and (mostly) risk-taking long-term bondholders. We establish that investor demands for safety create a negative relationship between the bank's capital choices and short-term funding, as well as negative relationships between capital and common measures of bank liquidity. Consistent with our model, our bank-level empirical analysis of these capital-liquidity tradeoffs show (1) that bank liquidity measures have a strong and negative relationship to its capital ratio ...
Working Paper
International Dollar Flows
Using confidential Federal Reserve data, we study the factors driving U.S. banknote flows between the United States and other countries. These flows are a significant component of capital flows in emerging market economies, where physical U.S. currency functions as a safe asset and precautionary demand for U.S. banknotes is a form of flight to quality. Prior to the global financial crisis, country-specific factors, including local economic uncertainty, largely explain the volume and heterogeneity of the flows. Since the crisis, global factors, particularly, global economic uncertainty, ...
Report
Fragility of Safe Asset Markets
In March 2020, safe asset markets experienced surprising and unprecedented price crashes. We explain how strategic investor behavior can create such market fragility in a model with investors valuing safety, investors valuing liquidity, and constrained dealers. While safety investors and liquidity investors can interact symbiotically with offsetting trades in times of stress, liquidity investors’ strategic interaction harbors the potential for self-fulfilling fragility. When the market is fragile, standard flight-to-safety can have a destabilizing effect and trigger a “dash-for-cash” by ...
Journal Article
Exploring the Safety Premium of Safe Assets
Investors are usually willing to pay a higher price, known as a premium, for a safe fixed-income asset in return for the convenience of its high quality and liquidity. A study of Swiss government bonds—widely considered to be extremely safe but not particularly liquid—can give some insights into how quality affects the premium. The large and variable safety premium of these bonds surged to persistently higher levels following the launch of the euro. However, subsequent large asset purchases by the European Central Bank depressed the safety premium.
Working Paper
The Effect of Safe Assets on Financial Fragility in a Bank-Run Model
Risk-averse investors induce competitive intermediaries to hold safe assets, thereby lowering the probability of a run and reducing financial fragility. We revisit Goldstein and Pauzner (2005), who obtain a unique equilibrium in the banking model of Diamond and Dybvig (1983) by introducing risky investment and noisy private signals. We show that, in the optimal demand-deposit contract subject to sequential service, banks hold safe assets to insure investors against investment risk. Consequently, fewer investors withdraw prematurely, which reduces the probability of a bank run. Safe asset ...
Working Paper
The Demand for Short-Term, Safe Assets and Financial Stability: Some Evidence and Implications for Central Bank Policies
A number of researchers have recently argued that the growth of the shadow banking system in the years preceding the recent U.S. financial crisis was driven by rising demand for "money-like" claims--short-term, safe instruments (STSI)--from institutional investors and nonfinancial firms. These instruments carry a money premium that lowers their yields. While government securities are an important part of the supply of STSI, financial intermediaries also take advantage of this money premium when they issue certain types of low-risk, short-term debt, such as asset-backed commercial paper or ...
Discussion Paper
What Makes a Safe Asset Safe?
Over the last decade, the concept of “safe assets” has received increasing attention, from regulators and private market participants, as well as researchers. This attention has led to the uncovering of some important details and nuances of what makes an asset “safe” and why it matters. In this blog post, we provide a review of the different aspects of safe assets, discuss possible reasons why they may be beneficial for investors, and give concrete examples of what these assets are in practice.
Working Paper
What Drives U.S. Treasury Re-use?
We study what drives the re-use of U.S. Treasury securities in the financial system. Using confidential supervisory data, we estimate the degree of collateral re-use at the dealer level through their collateral multiplier : the ratio between a dealer's total secured funding and their outright holdings financed through secured funding. We find that Treasury re-use increases as the supply of available securities decreases, especially when supply declines due to Federal Reserve asset purchases. We also find that non-U.S. dealers' re-use increases when profits from intermediating cash are high, ...
Working Paper
Accounting for Macro-Finance Trends: Market Power, Intangibles, and Risk Premia
Real risk-free interest rates have trended down over the past 30 years. Puzzlingly in light of this decline, (1) the return on private capital has remained stable or even increased, creating an increasing wedge with safe interest rates; (2) stock market valuation ratios have increased only moderately; (3) investment has been lackluster. We use a simple extension of the neoclassical growth model to diagnose the nexus of forces that jointly accounts for these developments. We find that rising market power, rising unmeasured intangibles, and rising risk premia, play a crucial role, over and ...
Working Paper
Decoupling Dollar and Treasury Privilege
We document a strong decoupling between the convenience yield on the US Dollar and US Treasuries. We measure the convenience of the U.S. dollar using covered interest parity (CIP) deviations between risk-free bank rates, such as secured overnight rates since the benchmark reform. In parallel, we measure the convenience of U.S. Treasury bonds through CIP deviations between government bond yields. We find a pronounced divergence between the two convenience measures in recent years: while the U.S. dollar exhibits strong convenience post-Global Financial Crisis, the U.S. Treasury convenience has ...