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The Supply and Demand of Safe Assets

Paper Session

Friday, Jan. 3, 2020 10:15 AM - 12:15 PM (PDT)

Marriott Marquis, Grand Ballroom 10
Hosted By: American Economic Association
  • Chair: Andrew Metrick, Yale University

Private Supply of Safe Assets: Shadow Banks Versus Traditional Banks

Stefan Gissler
,
Federal Reserve Board
Borghan Nezami Narajabad
,
Federal Reserve Board

Abstract

We show that the creation of private safe assets by shadow banks can crowd out traditional banks' supply of safe assets. The 2014-2016 money fund reform created a large demand shock for safe assets, to which Federal Home Loan Banks (FHLBs) responded, expanding their balance sheets and increasing their issuance of short-term debt. To reduce the resulting interest rate risk, FHLBs shortened the repricing of their loans to banks. Focusing on small banks for which the reform was exogenous, we use a novel instrumental variable strategy to show that shadow banks create safe assets at the expense of banks' deposits.

Understanding Collateral Re-use in the United States Financial System

Sebastian Infante
,
Federal Reserve Board
Charles Press
,
Federal Reserve Board
Zack Saravay
,
Federal Reserve Board

Abstract

We empirically document how primary dealers use and re-use collateral in the United States. Using confidential supervisory data, we map how collateral flows to and from individual dealers through different contracts and identify whether the collateral is encumbered or rehypothecated. From these data we estimate the degree of collateral re-use at the dealer level. Focusing on U.S. Treasuries, we posit three possible drivers behind the high degree of re-use we observe: 1) intermediation of cash, 2) intermediation of collateral, and 3) "stripping" and distribution of the safe asset benefits of U.S. Treasuries. This work contributes to research aimed at understanding how collateral circulation improves market functioning by increasing collateral availability, but may lead to fragility by increasing interconnectedness.

Who Ran on Repo?

Gary Gorton
,
Yale University
Andrew Metrick
,
Yale University
Chase Ross
,
Yale University

Abstract

The sale and repurchase (repo) market played a central role in the recent financial crisis. From the second quarter of 2007 to the first quarter of 2009, net repo financing provided to U.S. banks and broker-dealers fell by about $900 billion—more than half of its pre-crisis total. Significant details of this “run on repo” remain shrouded, because many of the providers of repo finance are lightly regulated or unregulated cash pools. Our analysis highlights the danger of relying exclusively on data from regulated institutions, which would miss the most important parts of the run.
Discussant(s)
Yiming Ma
,
Columbia University
Zoltan Pozsar
,
Credit Suisse
Mathias Kruttli
,
Federal Reserve Board
JEL Classifications
  • G2 - Financial Institutions and Services
  • G1 - General Financial Markets