July 2022

The Collateral Premium and Levered Safe-Asset Production

Chase P. Ross


Banks are vital suppliers of money-like safe assets, which they produce by issuing short-term liabilities and pledging collateral. But their ability to create safe assets varies over time as leverage constraints fluctuate. I present a model to describe private safe-asset production when intermediaries face leverage constraints. I measure bank leverage constraints using bank-intermediated basis trades. The collateral premium—a strategy long Treasuries used more often as repo collateral and short Treasuries used less often—has a positive expected return of 22 basis points per year because the collateral premium compensates for bank leverage risk.
Accessible materials (.zip)

DOI: https://doi.org/10.17016/FEDS.2022.046

PDF: Full Paper

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Last Update: August 08, 2022