Safe Assets as Balance Sheet Multipliers
40 Pages Posted: 24 May 2021 Last revised: 13 Jul 2021
Date Written: May 11, 2021
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: Suggested Citation