ESBies: Safety in the Tranches

Dimitri Vayanos, Markus Brunnermeier, Sam Langfield, Marco Pagano and Stijn Van Nieuwerburgh
Authors registered in the RePEc Author Service: Ricardo Reis

No 11537, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: The euro crisis was fueled by the diabolic loop between sovereign risk and bank risk, coupled with cross-border flight-to-safety capital flows. European Safe Bonds (ESBies), a union-wide safe asset without joint liability, would help to resolve these problems. We make three contributions. First, numerical simulations show that ESBies would be at least as safe as German bunds and approximately double the supply of euro safe assets when protected by a 30%-thick junior tranche. Second, a model shows how, when and why the two features of ESBies---diversification and seniority---can weaken the diabolic loop and its diffusion across countries. Third, we propose a step-by-step guide on how to create ESBies, starting with limited issuance by public or private-sector entities.

Keywords: Esbies; Euro crisis; Bank-sovereign loop; Safe assets; Monetary policy; Public debt issuance (search for similar items in EconPapers)
JEL-codes: E5 F3 G1 G2 H6 (search for similar items in EconPapers)
Date: 2016-09
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Related works:
Journal Article: ESBies: safety in the tranches (2017)
Working Paper: ESBies: safety in the tranches (2017)
Working Paper: ESBies: Safety in the tranches (2016)
Working Paper: ESBies: safety in the tranches (2016)
Working Paper: ESBies - Safety in the tranches (2016)
Working Paper: ESBies: Safety in the Tranches (2016)
Working Paper: ESBies: Safety in the tranches (2016)
Working Paper: ESBies: Safety in the tranches (2016)
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