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ESBies: Safety in the tranches

Author

Listed:
  • Markus K. Brunnermeier

    () (Princeton University)

  • Sam Langfield

    () (European Systemic Risk Board)

  • Marco Pagano

    () (Università di Napoli Federico II)

  • Ricardo Reis

    () (Centre for Macroeconomics (CFM)
    London School of Economics and Political Science (LSE))

  • Stijn Van Nieuwerburgh

    () (New York University)

  • Dimitri Vayanos

    () (London School of Economics and Political Science (LSE))

Abstract

The euro crisis was fueled by the diabolic loop between sovereign risk and bank risk, coupled with cross-border flight-to-safety capital flows. European Safe Bonds (ESBies), a union-wide safe asset without joint liability, would help to resolve these problems. We make three contributions. First, numerical simulations show that ESBies would be at least as safe as German bunds and approximately double the supply of euro safe assets when protected by a 30%-thick junior tranche. 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 a step-by-step guide on how to create ESBies, starting with limited issuance by public or private-sector entities.

Suggested Citation

  • Markus K. Brunnermeier & Sam Langfield & Marco Pagano & Ricardo Reis & Stijn Van Nieuwerburgh & Dimitri Vayanos, 2016. "ESBies: Safety in the tranches," Discussion Papers 1627, Centre for Macroeconomics (CFM).
    • Handle: RePEc:cfm:wpaper:1627
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    References listed on IDEAS

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    Cited by:

    1. Alogoskoufis, Spyros & Langfield, Sam, 2018. "Regulating the doom loop," ESRB Working Paper Series 74, European Systemic Risk Board.
    2. Athanasios Orphanides, 2017. "The Fiscal-Monetary Policy Mix in the Euro Area: Challenges at the Zero Lower Bound," European Economy - Discussion Papers 2015 - 060, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    3. Dunne, Peter G., 2018. "Positive Liquidity Spillovers from Sovereign Bond-Backed Securities," Research Technical Papers 5/RT/18, Central Bank of Ireland.
    4. Pasche, Markus, 2017. "ESBies as a Basis for a TARGET2 Settlement Mechanism," MPRA Paper 83012, University Library of Munich, Germany.
    5. Jeromin Zettelmeyer & Álvaro Leandro, 2018. "The Search for a Euro Area Safe Asset," Working Paper Series WP18-3, Peterson Institute for International Economics.
    6. Dunne, Peter G., 2018. "Positive liquidity spillovers from sovereign bond-backed securities," ESRB Working Paper Series 67, European Systemic Risk Board.
    7. repec:onb:oenbmp:y:2018:i:q2/18:b:6 is not listed on IDEAS
    8. Andritzky, Jochen & Christofzik, Désirée I. & Feld, Lars P. & Scheuering, Uwe, 2016. "A mechanism to regulate sovereign debt restructuring in the euro area," Working Papers 04/2016, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung.
    9. Ari, A. & Corsetti, G. & Dedola, L., 2018. "Debt Seniority and Sovereign Debt Crises," Cambridge Working Papers in Economics 1831, Faculty of Economics, University of Cambridge.
    10. van Riet, Ad, 2017. "Monetary Policy Stretched to the Limit: How Could Governments Support the European Central Bank?," MPRA Paper 83451, University Library of Munich, Germany.
    11. Ricardo J. Caballero & Alp Simsek, 2016. "A Model of Fickle Capital Flows and Retrenchment," NBER Working Papers 22751, National Bureau of Economic Research, Inc.
    12. Jean Pisani-Ferry, 2018. "Euro area reform: An anatomy of the debate," Sciences Po publications info:hdl:2441/4qcei72ijt9, Sciences Po.
    13. André Diniz & Bernardo Guimaraes, 2017. "How diabolic is the sovereign-bank loop? The effects of post-default fiscal policies," Discussion Papers 1705, Centre for Macroeconomics (CFM).
    14. Beck, Thorsten & Da-Rocha-Lopes, Samuel & Silva, Andre, 2017. "Sharing the Pain? Credit Supply and Real Effects of Bank Bail-ins," CEPR Discussion Papers 12058, C.E.P.R. Discussion Papers.
    15. repec:zbw:svrwjg:201718 is not listed on IDEAS
    16. repec:aea:jecper:v:31:y:2017:i:3:p:29-46 is not listed on IDEAS
    17. Cronin, David & Dunne, Peter G., 2018. "How effective are sovereign bond-backed securities as a spillover prevention device?," ESRB Working Paper Series 66, European Systemic Risk Board.
    18. Micossi, Stefano, 2017. "A Blueprint for Completing the Banking Union," CEPS Papers 13212, Centre for European Policy Studies.
    19. Monica Billio & Massimiliano Caporin & Lorenzo Frattarolo & Loriana Pelizzon, 2016. "Networks in risk spillovers: a multivariate GARCH perspective," Working Papers 2016:03, Department of Economics, University of Venice "Ca' Foscari".
    20. Mario Tonveronachi, 2018. "European Sovereign Bond-Backed Securities: An Assessment and an Alternative Proposal," Economics Public Policy Brief Archive ppb_145, Levy Economics Institute.
    21. van Riet, Ad, 2017. "Addressing the safety trilemma: a safe sovereign asset for the eurozone," ESRB Working Paper Series 35, European Systemic Risk Board.
    22. Perea, Maite De Sola & Dunne, Peter G. & Puhl, Martin & Reininger, Thomas, 2018. "Sovereign bond-backed securities: a VAR-for-VaR and Marginal Expected Shortfall assessment," ESRB Working Paper Series 65, European Systemic Risk Board.
    23. Koetter, Michael & Krause, Thomas & Tonzer, Lena, 2017. "Delay determinants of European Banking Union implementation," IWH Discussion Papers 24/2017, Halle Institute for Economic Research (IWH).

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    JEL classification:

    • J1 - Labor and Demographic Economics - - Demographic Economics

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