The Collateral Premium and Levered Safe-Asset Production

Chase Ross

No 2022-046, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

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 (search for similar items in EconPapers)
JEL-codes: E40 E51 G12 G20 (search for similar items in EconPapers)
Pages: 62 p.
Date: 2022-07-12
New Economics Papers: this item is included in nep-ban
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2022-46

DOI: 10.17016/FEDS.2022.046

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