The Collateral Premium and Levered Safe-Asset Production

62 Pages Posted: 21 Jul 2022

See all articles by Chase P. Ross

Chase P. Ross

Board of Governors of the Federal Reserve System

Date Written: July 1, 2022

Abstract

Banks are vital suppliers of money-like safe assets, which they produce by issuing short-term liabilities and pledging collateral. But their ability to create safe assets varies over time as leverage constraints fluctuate. I present a model to describe private safe-asset production when intermediaries face leverage constraints. I measure bank leverage constraints using bank-intermediated basis trades. The collateral premium—a strategy long Treasuries used more often as repo collateral and short Treasuries used less often—has a positive expected return of 22 basis points per year because the collateral premium compensates for bank leverage risk.

Keywords: Collateral, Bank leverage constraints, Repurchase agreement, Safe asset, Money

JEL Classification: E40, E51, G12, G20

Suggested Citation

Ross, Chase P., The Collateral Premium and Levered Safe-Asset Production (July 1, 2022). FEDS Working Paper No. 2022-46, Available at SSRN: https://ssrn.com/abstract=4168486 or http://dx.doi.org/10.17016/FEDS.2022.046

Chase P. Ross (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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