Download This PaperElusive Safety: The New Geography of Capital Flows and Risk
47 Pages Posted: 28 Apr 2020 Last revised: 29 May 2026
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Elusive Safety: The New Geography of Capital Flows and Risk
Elusive Safety: The New Geography of Capital Flows and Risk
Elusive Safety: The New Geography of Capital Flows and Risk
Date Written: April 2020
Abstract
A confidential dataset with industry-level disaggregation of U.S. cross-border claims and liabilities, shows U.S. securities to be increasingly intermediated by tax-haven-financial-centers (THFC) and less regulated funds. These securities are risky, in intangible-intensive sectors, requiring higher Sharpe ratios; while the foreign-official sector mainly holds Treasuries. Facts on private securities are rationalized through a model where firms with heterogeneous default probabilities, and funded by global intermediaries, endogenously locate affiliates in THFCs. A decline in the cost of funds or in THFC's taxes/regulation, raises profits and firms' incentives to enter THFCs. Firms appear elusively safe, intermediaries reduce monitoring incentives and debt risk increases.
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Ruth A. Judson
Board of Governors of the Federal Reserve System ( email )
20th Street and Constitution Avenue NW
Washington, DC 20551
United States
Tim Schmidt-Eisenlohr
Board of Governors of the Federal Reserve System ( email )
20th Street and Constitution Avenue NW
Washington, DC 20551
United States