Collateral Damage

Gary Gorton and Toomas Laarits

No 24298, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: A financial crisis is an event in which the holders of short-term debt come to question the collateral backing that debt. So, the resiliency of the financial system depends on the quality of that collateral. We show that there is a shortage of high-quality collateral by examining the convenience yield on short-term debt, which summarizes the supply and demand for short-term safe debt, taking into account the availability of high-quality collateral. We then show how the private sector has responded by issuing more (unsecured) commercial paper at shorter maturities. The results suggest that there is a shortage of safe debt now compared to the pre-crisis period, implying that the seeds for a new shadow banking system to grow exist.

JEL-codes: E4 E44 E58 G21 (search for similar items in EconPapers)
Date: 2018-02
New Economics Papers: this item is included in nep-ban and nep-mac
Note: AP CF EFG ME
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