safe assets Research Papers - Academia.edu (original) (raw)

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The absence of a robust and equitable legal framework for Sovereign Debt Restructuring generates important costs. Sovereigns with unsustainable debt often wait too long before they seek a restructuring, which is currently not within a... more

The absence of a robust and equitable legal framework for Sovereign Debt Restructuring generates important costs. Sovereigns with unsustainable debt often wait too long before they seek a restructuring, which is currently not within a predictable and transparent legal regime, therefore damaging creditors and debtors alike. This paper proposes a framework to address this problem from its origins: the im-paired liquidity of the sovereign debt securities in the financial markets stemming from the uncertainty on their safe status. This was allegedly the major cause of the recent financial crises and can be resolved through a clear and predictable legal regime, which assigns responsibilities to each of the many stake-holders involved in the management of the sovereign debt from its issuance to its restructuring. By enhancing coordination and transparency between domestic and international legal regimes (based on the subsidiary principle) through international multilateral organisations, this framework would intro-duce checks and balances both at a domestic and international level to enhance the necessary account-ability and trust from all stakeholders in order to shape a safer and more sustainable financial and legal regime.

We show that Quantitative Easing (QE) stimulates investment via a corporate-bond lending channel. Fed's large-scale asset purchases of MBS and treasuries through QE creates a vacuum of safe assets, prompting safer firms to invest more by... more

We show that Quantitative Easing (QE) stimulates investment via a corporate-bond lending channel. Fed's large-scale asset purchases of MBS and treasuries through QE creates a vacuum of safe assets, prompting safer firms to invest more by issuing relatively "safe" bonds. Using micro-data around QE, we find that QE increases firm-level investment by 7.4 percentage points for firms with bond market access. This growth is financed with senior bonds. We find no evidence of higher shareholders' payouts associated to QE. The robust findings are consistent with a model in which reducing the supply of government debt lowers "safe" corporate bond yields, stimulating investment. JEL Classif ication N umbers: E5, G01, G31, G32, G38.

LINK TO PDF FROM THE RESERVE BANK OF AUSTRALIA: https://www.rba.gov.au/publications/rdp/2021/pdf/rdp2021-01.pdf
This paper studies the role of collateral in credit markets under stress. Australian interbank markets at the time of the Lehman Brothers failure present a platform for identification, because the collateral is liquid and homogenous across borrowers (unlike in retail credit markets), the shock is large and exogenous (unlike in countries with bank failures), and there is comprehensive administrative collateralised and uncollateralised loan-level data. After the exogenous shock, collateralised and uncollateralised borrowing compositions diverge. Uncollateralised borrowing declines for ex ante riskier borrowers while collateralised borrowing increases for borrowers ex ante holding more high-quality collateral. Moreover, riskier banks with sufficient high-quality collateral substitute from uncollateralised to collateralised borrowing. In aggregate, collateralised borrowing expands substantially, predominantly collateralised against second-best (but still high quality) collateral, while interest rates on loans against first-best collateral fall substantially, indicating scarcity of the most-liquid safe assets. This liquid asset demand encourages collateralised lending, contrary to cash hoarding.

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