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Financial System Leverage and the Shortage of Safe Assets: Exploring the Policy Options

Author

Listed:
  • Bleich Dirk

    (Deutsche Bundesbank,Frankfurt, Germany)

  • Dombret Andreas

    (Deutsche Bundesbank,Frankfurt, Germany)

Abstract

In this article, we provide a simple supply and demand framework in which the build-up of an excessive level of leverage can result in a shortage of safe assets. On the basis of this, we discuss various policy options. First, we address the question of what policy-makers should do if shortages of safe assets arise. Second, we discuss what has to be done to prevent potential shortages of safe assets. Our main finding is that a smoother leverage cycle - which, in particular, implies less leverage in booms - is a major condition for preventing shortages of safe assets.

Suggested Citation

  • Bleich Dirk & Dombret Andreas, 2015. "Financial System Leverage and the Shortage of Safe Assets: Exploring the Policy Options," German Economic Review, De Gruyter, vol. 16(2), pages 161-180, May.
    • Handle: RePEc:bpj:germec:v:16:y:2015:i:2:p:161-180
    DOI: 10.1111/geer.12049
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