The Treasury Collateral Spread and Levered Safe-Asset Production

75 Pages Posted: 15 May 2024

See all articles by Chase P. Ross

Chase P. Ross

Board of Governors of the Federal Reserve System

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Date Written: May 15, 2024

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 write a simple model to describe private safe-asset production when intermediaries face leverage constraints. I directly measure leverage constraints using confidential supervisory data on high-frequency changes in the largest banks' repos. The collateral spread — the maturity-matched yield spread between Treasuries used as repo collateral more often and Treasuries used less often — averages about 0.5 basis points because it compensates for bank leverage risk.

Keywords: collateral, Treasuries, bank leverage constraints, repurchase agreement, safe asset

JEL Classification: E40, E51, G12, G20

Suggested Citation

Ross, Chase P., The Treasury Collateral Spread and Levered Safe-Asset Production (May 15, 2024). Available at SSRN: https://ssrn.com/abstract=4829283 or http://dx.doi.org/10.2139/ssrn.4829283

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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