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ESBies: safety in the tranches

Author

Listed:
  • Brunnermeier, Markus K.
  • Langfield, Sam
  • Pagano, Marco
  • Reis, Ricardo
  • Van Nieuwerburgh, Stijn
  • Vayanos, Dimitri

Abstract

The euro crisis was fuelled by the diabolic loop between sovereign risk and bank risk, coupled with cross-border flight-to-safety capital flows. European Safe Bonds (ESBies), a euro area-wide safe asset without joint liability, would help to resolve these problems. We make three contributions. First, numerical simulations show that ESBies with a subordination level of 30% would be as safe as German bunds and would increase safe asset supply. Second, a model shows how, when and why the two features of ESBies – diversification and seniority – can weaken the diabolic loop and its diffusion across countries. Third, we propose how to create ESBies, starting with limited issuance by public or private-sector entities.

Suggested Citation

  • Brunnermeier, Markus K. & Langfield, Sam & Pagano, Marco & Reis, Ricardo & Van Nieuwerburgh, Stijn & Vayanos, Dimitri, 2017. "ESBies: safety in the tranches," LSE Research Online Documents on Economics 74320, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:74320
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    • Markus K. Brunnermeier & Sam Langfield & Marco Pagano & Ricardo Reis & Stijn Van Nieuwerburgh & Dimitri Vayanos, 2017. "ESBies: safety in the tranches," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 32(90), pages 175-219.

    References listed on IDEAS

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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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