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

50 Pages Posted: 19 Nov 2015 Last revised: 17 Aug 2018

See all articles by Reena Aggarwal

Reena Aggarwal

Georgetown University - Robert Emmett McDonough School of Business

Jennie Bai

Georgetown University - Department of Finance

Luc Laeven

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

Date Written: July 31, 2018

Abstract

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

Aggarwal, Reena and Bai, Jennie and Laeven, Luc A., Safe Asset Shortages: Evidence from the European Government Bond Lending Market (July 31, 2018). Georgetown McDonough School of Business Research Paper No. 2692251. 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/

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

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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