ESBies: Safety in the Tranches

By Markus K. Brunnermeier, Sam Langfield, M. Pagano, Ricardo Reis, Stijn Van Nieuwerburgh, Dimitri Vayanos. Social Science Research Network, 2017

116 citations recorded by the source corpus.

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.

Subfields: Finance

View Paper: https://www.semanticscholar.org/paper/865140c119aab08995e6faa6ba403d69b0d8003f

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Citations in the corpus

The Invisible Hand of the Government: Moral Suasion during the European Sovereign Debt Crisis (2019, unknown): “Furthermore, the issuance of European Safe Bonds (ESBies) as envisioned by Brunnermeier et al. (2017) could play a role to the extent that their issuance would correspond adequately enough in time and volume with high funding needs in crisis-hit countries.”
The Safe Assets Shortage Conundrum (2017, background): “The proposal for “European Safe Bonds” (ESBies) is one prominent example (Brunnermeier et al. 2016), where liabilities for individual bonds remain with each sovereign, but the pooled assets issue a union-wide safer senior tranche.”