Safe Asset Shortages: Evidence from the European Government Bond Lending Market
Journal of Financial and Quantitative Analysis
53 Pages Posted: 19 Nov 2015 Last revised: 2 Oct 2020
Date Written: January 8, 2020
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: Suggested Citation