Working Paper: NBER ID: w24298
Authors: Gary B. Gorton; Toomas Laarits
Abstract: A financial crisis is an event in which the holders of short-term debt come to question the collateral backing that debt. So, the resiliency of the financial system depends on the quality of that collateral. We show that there is a shortage of high-quality collateral by examining the convenience yield on short-term debt, which summarizes the supply and demand for short-term safe debt, taking into account the availability of high-quality collateral. We then show how the private sector has responded by issuing more (unsecured) commercial paper at shorter maturities. The results suggest that there is a shortage of safe debt now compared to the pre-crisis period, implying that the seeds for a new shadow banking system to grow exist.
Keywords: financial crisis; collateral; convenience yield; shadow banking; short-term debt
JEL Codes: E4; E44; E58; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| shortage of high-quality collateral (E51) | convenience yield (D11) |
| convenience yield (D11) | issuance of private short-term debt (H74) |
| convenience yield (D11) | maturity structure of debt issuance (G32) |
| convenience yield (D11) | log of outstanding financial commercial paper (G29) |
| convenience yield (D11) | average maturities of commercial paper (G32) |