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://explore.georgetown.edu/people/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

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
511
Abstract Views
2,475
rank
61,565
PlumX Metrics