The Private Production of Safe Assets
57 Pages Posted: 12 Jun 2017 Last revised: 23 Feb 2019
Date Written: February 22, 2019
How fragile is the production of safe assets by the private sector? We answer this question using high-frequency data on certificates of deposit (CDs) issued in Europe. We show that only short-term CDs benefit from a safety premium. Using two identification strategies, we further show that the issuance of short-term CDs strongly responds to measures of safety demand. During periods of stress, this relation vanishes. However, high-quality issuers are still able to issue safe assets in periods of stress as investors distinguish between high- and low-quality issuers. Therefore, concerns about externalities arising from private safety production may be partially overstated.
Keywords: Safe assets, Collateral, Short-term debt, Treasuries
JEL Classification: E44, G21
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