Safe Asset Shortages: Evidence from the European Government Bond Lending Market
50 Pages Posted: 19 Nov 2015 Last revised: 17 Aug 2018
Date Written: July 31, 2018
We identify the unique role of the government bond lending market in accessing safe assets during periods of market stress. Using a novel database, we provide evidence that safe assets in the lending market have higher demand and higher borrowing cost 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. These attributes are important since they increase the velocity of safe assets and hence alleviate the pressure of safe asset shortages. We show that policy interventions by central banks can help reduce safe asset shortages by returning sought-after safe assets to the lending market.
Keywords: safe asset, securities lending, velocity, European government bonds, collateral
JEL Classification: E44, E58, G24
Suggested Citation: Suggested Citation