Financial System Leverage and the Shortage of Safe Assets: Exploring the Policy Options

Bleich Dirk and Dombret Andreas
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Bleich Dirk: Deutsche Bundesbank,Frankfurt, Germany
Dombret Andreas: Deutsche Bundesbank,Frankfurt, Germany

German Economic Review, 2015, vol. 16, issue 2, 161-180

Abstract: In this article, we provide a simple supply and demand framework in which the build-up of an excessive level of leverage can result in a shortage of safe assets. On the basis of this, we discuss various policy options. First, we address the question of what policy-makers should do if shortages of safe assets arise. Second, we discuss what has to be done to prevent potential shortages of safe assets. Our main finding is that a smoother leverage cycle - which, in particular, implies less leverage in booms - is a major condition for preventing shortages of safe assets.

Keywords: financial stability; financial cycle; leverage; safe assets (search for similar items in EconPapers)
Date: 2015
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DOI: 10.1111/geer.12049

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