Safe Asset Shortages: Evidence from the European Government Bond Lending Market

Georgetown McDonough School of Business Research Paper No. 2692251

Journal of Financial and Quantitative Analysis

53 Pages Posted: 19 Nov 2015 Last revised: 2 Oct 2020

See all articles by Reena Aggarwal

Reena Aggarwal

Georgetown University - Robert Emmett McDonough School of Business ; European Corporate Governance Institute (ECGI)

Jennie Bai

Georgetown University - Department of Finance; National Bureau of Economic Research (NBER)

Luc Laeven

European Central Bank (ECB); Centre for Economic Policy Research (CEPR)

Date Written: January 8, 2020

Abstract

We identify the unique role of the government bond lending market in collateral transformation during periods of market stress. Using a novel database, we provide evidence that safe assets in the lending market have higher demand, higher borrowing cost, and higher usage of non-cash collateral relative to non-safe assets during stressed market conditions. Moreover, we find that market participants are able to obtain safe assets using relatively low-quality non-cash collateral, allowing for collateral transformation. We show that policy interventions by central banks can help reduce safe asset shortages by returning sought-after safe assets to the market.

Keywords: safe asset, securities lending, velocity, European government bonds, collateral

JEL Classification: E44, E58, G24

Suggested Citation

Aggarwal, Reena and Bai, Jennie and Laeven, Luc A., Safe Asset Shortages: Evidence from the European Government Bond Lending Market (January 8, 2020). Georgetown McDonough School of Business Research Paper No. 2692251, Journal of Financial and Quantitative Analysis, Available at SSRN: https://ssrn.com/abstract=2692251 or http://dx.doi.org/10.2139/ssrn.2692251

Reena Aggarwal

Georgetown University - Robert Emmett McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States
202-687-3784 (Phone)
202-687-0798 (Fax)

HOME PAGE: http://https://gufaculty360.georgetown.edu/s/contact/00336000014RhE9AAK/reena-aggarwal

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Jennie Bai (Contact Author)

Georgetown University - Department of Finance ( email )

3700 O Street, NW
Washington, DC 20057
United States

HOME PAGE: http://www.jenniebai.com

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Luc A. Laeven

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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