Safe Assets as Balance Sheet Multipliers

40 Pages Posted: 24 May 2021 Last revised: 13 Jul 2021

See all articles by Emre Ozdenoren

Emre Ozdenoren

London Business School; Centre for Economic Policy Research (CEPR)

Kathy Yuan

London School of Economics & Political Science (LSE) - Department of Finance

Shengxing Zhang

London School of Economics (LSE) - Department of Economics

Date Written: May 11, 2021

Abstract

We highlight the multiplier role of (public) safe assets by studying a model of a bank’s balance sheet. The bank optimally constructs a portfolio of safe and risky assets and designs its liabilities. Holding costly but adverse-selection-free safe assets multiplies the production of risky assets with information frictions and facilitates the issuance of private safe debts backed by the asset portfolio, expanding the bank’s balance sheet. Safe assets' convenient yields can be decomposed into safety and liquidity components. Quantitative easing operations such as safe for troubled asset swaps improve fiscal capacity of governments and are more liquidity effective.

Keywords: Adverse Selection; Collateral; Convenience Yields; Financial Fragility; Narrow banking; QE; Quality-Sensitive Assets; Safe Assets; Safety Premium; Security Design; Shadow Banking.

JEL Classification: G10, G01

Suggested Citation

Ozdenoren, Emre and Yuan, Kathy Zhichao and Zhang, Shengxing, Safe Assets as Balance Sheet Multipliers (May 11, 2021). Available at SSRN: https://ssrn.com/abstract=3851334 or http://dx.doi.org/10.2139/ssrn.3851334

Emre Ozdenoren

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Kathy Zhichao Yuan

London School of Economics & Political Science (LSE) - Department of Finance ( email )

Old Building
Houghton Street
London, London WC2A 2AE
United Kingdom
+44 (0)20 7955 6407 (Phone)
+44 (0)20 7849 4647 (Fax)

HOME PAGE: http://fmg.lse.ac.uk/~kathy

Shengxing Zhang (Contact Author)

London School of Economics (LSE) - Department of Economics ( email )

Houghton Street
London WC2A 2AE
United Kingdom

HOME PAGE: http://https://sites.google.com/site/oo7zsx/

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