ESBies: safety in the tranches

Brunnermeier, Markus K., Langfield, Sam, Pagano, Marco, Reis, Ricardo ORCID: 0000-0003-4844-9483, Van Nieuwerburgh, Stijn and Vayanos, Dimitri ORCID: 0000-0002-0944-4914 (2017) ESBies: safety in the tranches. Economic Policy, 32 (90). 175 - 219. ISSN 0266-4658

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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.

Item Type:	Article
Official URL:	https://academic.oup.com/economicpolicy
Additional Information:	© 2017 CEPR, CESifo, Sciences Po
Divisions:	Economics Finance
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HG Finance
JEL classification:	E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation
Date Deposited:	25 Apr 2017 10:46
Last Modified:	12 Dec 2024 01:28
URI:	http://eprints.lse.ac.uk/id/eprint/74320

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