Philip R. Lane: Expanding the supply of euro safe assets

Keynote speech by Philip R. Lane, Member of the Executive Board of the ECB, at the joint workshop of the European Systemic Risk Board Advisory Technical Committee and Advisory Scientific Committee on “A European Safe Asset and Financial Stability”

A foundational element of any autonomous monetary system is the existence of a benchmark safe asset that serves as the anchor for asset pricing.[1] Such a safe asset should be highly liquid, so that an investor can transact in large volumes without affecting market pricing. The safe asset should also rise in relative value during stress episodes, acting as a hedge against the volatility of risk assets. By extension, it is desirable for the international monetary system that there are global safe assets that are highly liquid (directly or indirectly) and rise in currency-adjusted value during stress episodes.[2]

The current design of the euro area financial architecture results in an undersupply of euro-denominated safe assets. Since the Bund is the highest-rated large-country national bond in the euro area, it serves as the main de facto euro-denominated safe asset. However, the stock of Bunds is too small relative to the size of the euro area or the global financial system to satiate the demand for euro-denominated safe assets.