The Supply and Demand for Safe Assets

Gorton, Gary; Ordóñez, Guillermo

doi:10.2139/ssrn.2202237

Cited by 46 publications

(49 citation statements)

References 28 publications

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“…In contrast to Holmström and Tirole, the limitation of private liquidity supply originates not from agency problems, but from coordination problems. In terms of our results, this paper is close to a series of recent papers (Greenwood et al, 2012;Gourinchas and Jeanne, 2012;Gorton and Ordoñez, 2013). With Gorton and Ordoñez (2013), we share the notion that government bonds are more liquid than privately produced assets and make the economy more stable.…”

Section: Introductionsupporting

confidence: 84%

“…In terms of our results, this paper is close to a series of recent papers (Greenwood et al, 2012;Gourinchas and Jeanne, 2012;Gorton and Ordoñez, 2013). With Gorton and Ordoñez (2013), we share the notion that government bonds are more liquid than privately produced assets and make the economy more stable. However, their reasoning is based on the information sensitivity of assets.…”

Section: Introductionsupporting

confidence: 84%

“…Publicly issued claims may guarantee the provision of liquidity and reduce the need to set liquid real assets aside Tirole, 1998, 2011). Moreover, it lies in the nature of government bonds that they mitigate the adverse selection problems typically associated with liquidity provision because they are free from private information (Gorton and Pennacchi, 1990;Gorton and Ordoñez, 2013).…”

Section: Introductionmentioning

confidence: 99%

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Outside Liquidity, Rollover Risk, and Government Bonds

Luck

Schempp

2014

SSRN Journal

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This paper discusses whether financial intermediaries can optimally provide liquidity, or whether the government has a role in creating liquidity by supplying government securities. We discuss a model in which intermediaries optimally manage liquidity with outside rather than inside liquidity: instead of holding liquid real assets that can be used at will, banks sell claims on long-term projects to investors. While increasing efficiency, liquidity management with private outside liquidity is associated with a rollover risk. This rollover risk either keeps intermediaries from providing liquidity optimally, or it makes the economy inherently fragile. In contrast to privately produced claims, government bonds are not associated with coordination problems unless there is the prospect that the government may default. Therefore, efficiency and stability can be enhanced if liquidity management relies on public outside liquidity.

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Section: Introductionsupporting

confidence: 84%

Section: Introductionsupporting

confidence: 84%

Section: Introductionmentioning

confidence: 99%

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Outside Liquidity, Rollover Risk, and Government Bonds

Luck

Schempp

2014

SSRN Journal

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“…They perform as the lubricant, benchmark, or substitute of trust in most financial transactions (IMF, 2012). In previous studies, Gorton and Ordonez (2013) explained that there is a demand for safe assets, either government bonds or private substitutes, for use as collateral. However, only US Treasuries qualify for de facto safe assets, creating the gap between the supply and demand for safe assets.…”

Section: Rationale For a Regional Repo Market Developmentmentioning

confidence: 99%

A Regional Repo Market Initiative for Global Financial Stability

Choi¹

2017

JEW

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The prevailing global financial system suffers from a shortage of good collateral for increased reliance on nonbank secured lending. Given that the global financial crisis was mainly triggered by the collapse of the collateral pool for dealer-based credit intermediation, this issue needs to be resolved quickly for normalized credit supply. Primarily, increased supply capacity for safe assets that can serve as valid collateral is the key agenda. This would be possible with a better use of USTs that are kept in EME silos and a broader recognition of an emerging market sovereign collateral pool. The inclusion of new collateral into the expanded and invigorated repo system that includes Asia would stabilize global capital flows and improve financial stability. In a related context, a market-driven, risk-mitigating regional repo market initiative would also bring balance to an increasingly market-driven financial ecosystem and mitigate the global shortage of safe assets.

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“…Furthermore, government securities -unlike private assets -are not subject to adverse selection (Gorton and Ordoñez, 2013), and government securities are simply less exposed to rollover risk than privately produced assets (Luck and Schempp, 2014). …”

Section: Banking Sectormentioning

confidence: 99%

Sovereign Defaults, Bank Runs, and Contagion

Luck

Schempp

2014

SSRN Journal

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We provide a model that unifies the notion of self-fulfilling banking crises and sovereign debt crises. In this model, a bank run can be contagious by triggering a sovereign default, and vice versa. A deposit insurance scheme can eliminate the adverse equilibrium only if the government can repay its debt and credibly insure deposits irrespective of the performance of the financial sector. Moreover, we analyze how banking crises and sovereign defaults can be contagious across countries. We give conditions under which the implementation of a banking union is effective and costless. Finally, we discuss the current proposals for a banking union in the euro area and argue that it should be extended by a supranational Deposit Guarantee Scheme.

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The Supply and Demand for Safe Assets

Cited by 46 publications

References 28 publications

Outside Liquidity, Rollover Risk, and Government Bonds

Outside Liquidity, Rollover Risk, and Government Bonds

A Regional Repo Market Initiative for Global Financial Stability

Sovereign Defaults, Bank Runs, and Contagion

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