The Collateral Premium and Levered Safe-Asset Production
(job market paper)
Banks are vital suppliers of money-like safe assets: banks produce safe assets by issuing short-term liabilities and pledging collateral. But their ability to create safe assets varies over time as leverage constraints fluctuate. I present a model to describe private safe-asset production when intermediaries face leverage constraints. I measure bank leverage constraints using bank-intermediated basis trades. The collateral premium — a strategy long Treasuries used more often as repo collateral and short Treasuries used less often — has a positive expected return of 65 basis points per year because the collateral premium compensates for bank leverage risk.