Quantitative Easing and the Safe Asset Illusion

52 Pages Posted: 11 Jun 2021

See all articles by Alexander Bechtel

Alexander Bechtel

University of St. Gallen - School of Finance

Jens Eisenschmidt

European Central Bank (ECB)

Angelo Ranaldo

University of St. Gallen; University of St. Gallen - School of Finance

Alexia Ventula Veghazy

European Central Bank (ECB)

Date Written: June 9, 2021

Abstract

The massive recourse to quantitative easing (QE) calls for a better understanding of its effects on safe assets. Based on a simple balance sheet framework, we show how QE impacts the total amount, cross-sectional distribution, and composition of safe assets in the economy. Analyzing the ECB’s Public Sector Purchase Programme (PSPP), we find that the amount of universally accessible safe assets decreases and there is a transfer of safe assets from the non-bank to the banking sector. We call this phenomenon the safe asset illusion. The sectoral shift in the holding structure of safe assets has important implications for financial stability and the cost of secured liquidity.

Keywords: Safe assets, quantitative easing, Public Sector Purchase Programme, secured deposits, repurchase agreements

JEL Classification: G12, G18, G21, E43, E52, D40

Suggested Citation

Bechtel, Alexander and Eisenschmidt, Jens and Ranaldo, Angelo and Veghazy, Alexia Ventula, Quantitative Easing and the Safe Asset Illusion (June 9, 2021). Available at SSRN: https://ssrn.com/abstract=3864112. or http://dx.doi.org/10.2139/ssrn.3864112

Alexander Bechtel (Contact Author)

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

Jens Eisenschmidt

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Angelo Ranaldo

University of St. Gallen ( email )

Swiss Institute of Banking and Finance s/bf-HSG
Unterer Graben 21
St. Gallen, 9000
Switzerland
+41712247010 (Phone)

HOME PAGE: http://www.sbf.unisg.ch/Lehrstuehle/Lehrstuhl_Ranaldo/Homepage_Ranaldo.aspx

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

Alexia Ventula Veghazy

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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