Time: 7.30 - 9.00
Venue: LSE
Speakers: Ricardo Reis and Dimitri Vayanos (LSE)
The euro crisis was fuelled by the diabolic loop between sovereign risk and bank risk, coupled with cross‐border flight‐to‐safety capital flows that materialised into sudden stops into the European periphery. European Safe Bonds (ESBies), a union‐wide safe asset without joint liability, are one prominent proposal to help resolve these problems. ESBies are formed by the senior tranche of a diversified portfolio of euro area sovereign bonds. Numerical simulations show that ESBies would be at least as safe as German bunds and would approximately double the supply of euro‐denominated safe assets when protected by a 30%‐thick junior tranche. The introduction of ESBies should be accompanied by a change in bank regulation that weighs euro area sovereign debt according to its riskiness, creating demand for ESBies as a safe and geographically diversified asset that banks can hold breaking the diabolic loop.
The details of the ESBies proposal, including numerical simulations and an implementation guide, are outlined in this paper and are summarized in the VoxEU column http://voxeu.org/article/esbies-safety-tranches.
The ESBies proposal was presented and discussed with market experts at the breakfast meeting.
